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Bond Report: 30-year Treasury yield hits lowest since September amid fears that Fed hikes will trigger U.S. slowdown

Treasury yields fell on Tuesday, pushing the 30-year rate to its lowest level since September, as the likelihood of further interest-rate increases by the Federal Reserve collided with fears of a U.S. slowdown.

What’s happening

The yield on the 2-year Treasury
TMUBMUSD02Y,
4.349%

declined 3.4 basis points to 4.358% from 4.392% on Monday.

The yield on the 10-year Treasury
TMUBMUSD10Y,
3.521%

retreated 8.6 basis points to 3.512% from 3.598% late Monday.

The yield on the 30-year Treasury
TMUBMUSD30Y,
3.532%

fell 9.4 basis points to 3.521% from 3.615% as of Monday afternoon. That’s the lowest level since Sept. 21, based on 3 p.m. figures from Dow Jones Market Data.

What drove markets

Tuesday’s drop in yields was a “textbook” example of “slowdown fear repricing as the Fed prepares to push policy rates up and terminal estimates higher, even as the headwinds facing the economy build,” said BMO Capital Markets strategists Ben Jeffery and Ian Lyngen.

Following Monday’s better-than-expected survey of service-sector activity and Friday’s healthy jobs data, the reports raised worries that the Federal Reserve may need to continue increasing borrowing costs for longer, even if it slows the pace of interest-rate hikes as soon as next week.

Markets are pricing in a 77% probability that the Fed will lift its policy interest-rate target by another 50 basis points to a range of 4.25% to 4.50% on Dec. 14, according to the CME FedWatch tool. The central bank is mostly expected to take its fed-funds rate target to above 5% by June.

In U.S. economic releases Tuesday, the U.S. trade deficit widened 5.4% in October to a four-month high of $78.2 billion, as the global economy weakened.

What analysts are saying

“The market is realizing that the labor market’s strength is the biggest hurdle to a Fed pause or pivot because employment is a barrier to lower inflation,” said Ryan Belanger, founder and managing principal of Claro Advisors, a wealth management firm in Boston. Investors appears to be “repricing November’s optimism, which was fueled by hopes that the Fed would be willing to pause its pace of rate hikes.”

The fed-funds rate “is likely to reach close to 6% over the next year and it may be decades before we see 0% interest rates again,” Belanger said. “The Fed has been crystal clear on its intentions to slow the economy in order to cool inflation and it’s unwise to fight the Fed at this point.”

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