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Treasury Yields Reverse Some of Last Week's Decline

November 6, 2023
minute read

Treasury yields exhibited an upward trend on Monday morning, as traders contemplated the possibility of another Federal Reserve rate hike occurring by January.

The dynamics at play are as follows:

  1. The yield on the 2-year Treasury (BX:TMUBMUSD02Y) experienced an increase of 7.1 basis points, reaching 4.899% from 4.828% recorded on the preceding Friday. It's important to note that yields move inversely to bond prices.
  2. Similarly, the yield on the 10-year Treasury (BX:TMUBMUSD10Y) rose by 5.6 basis points to 4.613% from the previous Friday's 4.557%.
  3. The 30-year Treasury (BX:TMUBMUSD30Y) yield also saw a gain of 4.6 basis points, moving up to 4.796% from 4.750% at the end of the previous week.

The impetus behind these market movements can be traced to a reevaluation by traders and economists regarding the likelihood of a slowdown in the U.S. economy, coupled with considerations of potential actions from the Federal Reserve early in the coming year.

Economists at Barclays, a primary dealer for U.S. Treasurys, have revised their forecast for a Federal Reserve rate hike, now projecting it to occur in January. This shift in their stance reflects the evolving economic landscape. Simultaneously, traders in Fed funds futures markets have raised the probability of a quarter-point rate hike occurring by January to 14.8%. Such a move would push the fed-funds rate target to a range of 5.5% to 5.75%, up from the 8.6% probability estimated on the previous Friday.

The decline in Treasury yields witnessed the week prior had unintended consequences for the central bank, as it left officials in a precarious situation described as a "circularity loop." This loop undermines the central bank's ability to formulate policy based on the tightening conditions observed, according to analysts at Barclays.

Federal Reserve Governor Lisa Cook is scheduled to deliver a speech at Duke University at 11 a.m. Eastern time. Additionally, the central bank will release its senior loan officer survey for October at 2 p.m., which will be closely scrutinized for insights into the economic outlook.

In light of these developments, market strategists have weighed in on the situation. Will Compernolle, a macro strategist at FHN Financial in New York, offered a contrarian perspective. He expressed skepticism about the notion that the U.S. economy is on the brink of a recession, despite the prevailing sentiment in some quarters. Compernolle pointed out that recent data might not be indicative of an imminent economic downturn.

For instance, he highlighted that the ISM (Institute for Supply Management) indices have struggled to reliably predict actual economic performance over the past year, and confidence and sentiment indicators have deteriorated even as consumer spending has remained robust. Moreover, data like the JOLTS (Job Openings and Labor Turnover Survey) numbers and the October employment report did not align with the dire predictions suggested by headline figures. In essence, Compernolle's view contradicts the narrative of a looming recession, emphasizing the resilience of the economic expansion.

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Adan Harris
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