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Bond Report: Benchmark 10-year Treasury yield rises to start week but holds below 1.50%

The benchmark 10-year Treasury yield on Monday was climbing modestly, after putting in the sharpest weekly decline since June 2020, even as an important report on Friday showed that employment for October was stronger-than-expected.

Investors continue to parse the Federal Reserve’s decision last Wednesday to slow monthly purchases of Treasurys and mortgage-backed securities, and the House of Representatives approval an infrastructure package.

What are yields doing?

The 10-year Treasury note yield
TMUBMUSD10Y,
1.488%

was at 1.485%, compared with 1.451% on Friday at 3 p.m. ET, marking the lowest yield since Sept. 23 and its largest weekly decline since the week ended June 12, 2020, according to Dow Jones Market Data.

The 2-year Treasury note yields
TMUBMUSD02Y,
0.426%

0.431%, up from 0.399% on Friday, which was its lowest since Oct. 20, following its sharpest weekly decline since March 27, 2020.

The 30-year Treasury bond rate
TMUBMUSD30Y,
1.904%

was at 1.911%, compared with 1.885% on Friday, which marked its lowest yield since Sept. 22.

What’s driving the market?

After embarking on a reduction of its COVID-era, monthly asset purchases, debate about the pace of interest-rate increases appears to be creating some unevenness in Treasury trading.

Fixed-income investors have harbored concerns that the Fed’s latest actions to engineer a soft landing for the U.S. economy amid rising inflation pressures could result in a policy error, as Chairman Jerome Powell said the central bank could remain “patient” about when to raise interest rates as it kicked of its tapering initiative, as has been widely expected.

Powell has said that it was possible that the job market could improve sufficiently to warrant rate liftoff by the second half of 2022, running against market expectations for multiple rate increases by that time.

Data on employment for Friday showed that the U.S. economy created 531,000 jobs in October, compared with economists’ average forecast for a rise of 450,000, according to a survey by The Wall Street Journal. The unemployment rate fell to 4.6% last month from 4.8%. Also, September job gains were raised to 312,000 from a previous estimate of 194,000, while August jobs were raised to 483,000 from 366,000.

Market participants have widely credited the retreat in yields, despite indications of the Fed’s intention to taper and expectations of rate increases, to buying of Treasurys by foreign investors and the hawkish actions of other central banks.

Investors also are closely watching for signs about the reappointment of Powell, whose term as Fed boss expires in 2022, following reports last week that President Joe Biden met with the chairman and Fed Gov. Lael Brainard at the White House on Thursday.

Looking ahead, investors will be focused on Wednesday’s consumer-price index, or CPI, for further evidence of inflation.

Last week, the Fed in its updated policy statement said that “inflation is elevated, largely reflecting factors that are expected to be transitory.”

The statement from policy makers also repeated a refrain that “supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases in some sectors.”

On Monday, investors will hear from a number of Fed speakers, including an interview of St. Louis Fed President James Bullard, who is set to appear on Fox Business at 8:30 a.m. ET. In addition, Fed Vice Chair Richard Clarida is set to discuss inflation targeting and the prospects for monetary policy at a virtual event hosted by Brookings Institution at 9 a.m., while Powell will deliver opening remarks at a Fed conference at 10 a.m., followed by Fed Gov. Michelle Bowman at 12 p.m. Philadelphia Fed President Patrick Harker will talk at the Economic Club of New York also at noon.

Chicago Fed President Charles Evans will speak at 1:50 p.m. at an automotive-supply event.

Meanwhile, Biden notched a big win with the House passage of the $1 trillion public-works bill late Friday, but political obstacles loom ahead for the White House as attention shifts to an even bigger spending bill and next year’s midterm elections.

Investors may be focused on a $56 billion auction of three-year notes
TMUBMUSD03M,
0.043%

at 1 p.m.

What analysts are saying

“The front-end of the curve has been whipsawed by confusing signals from global central banks and a shuffle in rate hike bets. Despite the strong employment data last week, the front-end of the U.S. curve has been rallying. The recent rally and the early timing for the auction don’t leave much time or room for the traditional auction setup, which could lead to a little bit of sloppiness. The smaller size this month mitigates some of this risk, however, so a screws stop seems likely,” wrote economists Thomas Simons and Aneta Markowska of Jefferies, in a note.

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