Bond yields fell on Tuesday as traders worried that COVID-19 restrictionx in China may further damage global economic growth.
What’s happening
-
The yield on the 2-year Treasury
TMUBMUSD02Y,
4.512%
slipped 2.1 basis points to 4.501%. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury
TMUBMUSD10Y,
3.799%
retreated 3.7 basis points to 3.796%. -
The yield on the 30-year Treasury
TMUBMUSD30Y,
3.889%
fell 2 basis points to 3.884%.
What’s driving markets
Treasury yields nudged lower as additional COVID-19 lockdowns in China were seen increasing the chances of a global economic slowdown.
“Market sentiment is fragile on uncertainty regarding whether China would make a U-turn on its COVID reopening plans,” said Ipek Ozkardeskaya, senior analyst at Swissquote
The spread between the U.S. 2- and 10-year yields is minus about 70 basis points, close to its most inverted in more than 40 years, a sign that “recession will be inevitable,” Ozkardeskaya added.
There are no U.S. economic updates of note set for release on Tuesday. However, Kansas City Fed President Esther George is due to speak at 2:15 p.m.
Markets are pricing in a 71% probability that the Fed will raise interest rates by another 50 basis points to a range of 4.25% to 4.50% after its meeting on December 14th, according to the CME FedWatch tool. The central bank is expected to take its Fed funds rate target to 5.1% by June 2023, according to 30-day Fed Funds futures.
What are analysts saying
“U.S. Treasury yields are a bit adrift here, awaiting the next incoming data for next steps, with tomorrow’s batch of U.S. data unlikely to move the needle as we await next Wednesday’s PCE inflation data and next Friday’s November U.S. jobs report,” said the strategy team at Saxo Bank, in a morning note.
“The key upside swing area for the 10-year yields is near 4.00%, while the major downside focus beyond the 3.67% pivot low is the 3.50% cycle high from June. The 2-10 yield curve inversion remains near its lows for the cycle, at –70 basis points this morning,” Saxo added.
