Bond Report: Treasury yields climb Friday, 10-year posts biggest weekly yield jump in a month while inflation cools

U.S. Treasury yields rose on Friday, with the 10-year Treasury notching its biggest weekly yield climb in a month, even though data for December showed a further cooling in the Federal Reserve’s preferred measure of inflation.

What’s happening

The yield on the 2-year Treasury

rose 2.9 basis points to 4.205% as of 3 p.m. Eastern. Yields move in the opposite direction to prices.

The yield on the 10-year Treasury

advanced 2.6 basis points to 3.517%.

The yield on the 30-year Treasury

gained 0.5 basis points to 3.632%. It fell 2.3 basis points over the week.

But it was the biggest weekly yield gain for the 2-year and 10-year rates since Dec. 30, according to Dow Jones Market Data.

What’s driving markets

The focus Friday was the release of economic data showing the annual increase in the cost of U.S. goods and services pulled back to 5% in December from 5.5% a month before, signaling further progress in the Fed’s inflation fight.

The Fed’s preferred measure of inflation — the PCE price index — peaked at 7% last summer, helped along by a retreat in energy prices, but remains high above the central bank’s target of 2%.

Another economic report on consumer spending on Friday showed a 0.2% decline in December as households spent less on gas, cars and other goods, but more on services. It also indicated the U.S. economy entered the new year with fading growth prospects and rising odds of recession. Analysts polled by The Wall Street Journal had forecast a 0.1% decline.

“A number of indicators are flashing red lights that a recession may be upon us,” Bill Adams, chief economist at Comerica Bank, said in emailed comments. “With cooler inflation and increased signs that the economy may have in fact turned, financial markets are pricing in a smaller quarter percentage point rate hike for the Fed’s decision next week — and are now also pricing in the possibility that the Fed holds rates unchanged at their following decision in March.”

The PCE index released was one of the last data released ahead of the Federal Open Market Committee decision on Wednesday.

Read: Fed set to deliver quarter-point rate hike along with ‘one last hawkish sting in the tail’

What strategists are saying

“Next week is one for the record book,” BofA Global’s rates team lead by Ralf Preusser said Friday in a client note.

Never before has the team seen the Federal Reserve, the European Central Bank and the Bank of England all been on deck to deliver policy decisions in the same week as a torrent of global economic data — from updates on the U.S. labor market to inflation in the Euro Area — plus, month-end fund flows, they said.

“Our economists remain hawkish relative to market pricing, expecting a terminal [fed funds] target range of 5.00-5.25%. and the first cut not until Mar-2024, for which forwards price 100 bp more cuts than our colleagues expect.”

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