Treasury yields finish with weekly declines for second time in past three weeks

What happened

• The yield on the 2-year Treasury
  BX:TMUBMUSD02Y
  declined 2.9 basis points to a two-week low of 5.010% from 5.039% on Thursday. The rate fell 7.2 basis points this week, the largest weekly decline in about a month.

• The yield on the 10-year Treasury
  BX:TMUBMUSD10Y
  was marginally higher at 4.846% versus 4.843% Thursday afternoon. It declined 7.8 basis points this week.

• The yield on the 30-year Treasury
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  rose 3.7 basis points to 5.023% from 4.986% late Thursday. The 30-year rate dropped 6.4 basis points this week.

What drove markets

Data released on Friday showed that inflation rose faster than expected, based on the Fed’s preferred gauge.  The so-called PCE price index rose 0.4% for the second month in a row in September, spurred in part by higher oil prices. The index has risen 3.4% over the past year, unchanged from the prior month.

Core inflation — which excludes food and energy, and matters most to policy makers— fell to 3.7% from 3.8% previously on a year-on-year basis, providing investors and traders with at least a kernel of hope that such readings might continue to ease further.

Yields had tumbled on Thursday, despite a surprisingly strong 4.9% annual pace of growth for the U.S. economy in the third quarter. While the Fed is mostly expected to take no action next Wednesday, investors will be focused on hints of any possibility of a rate hike in December or January.

Read: Pressure still on Fed as cost of goods and services rises more than expected and Stocks to struggle for traction as markets play ‘game of chicken’ with Fed on higher-for-longer interest rates

Meanwhile, Wall Street is bracing for roughly $1.5 trillion of additional borrowing needs by Treasury ahead of next week’s quarterly refunding announcement.

What analysts are saying

Friday’s PCE inflation report “provided confirmation that the Federal Reserve’s monetary policy is continuing to reduce inflation over time, albeit slowly,” said Brian Pietrangelo, senior vice president and managing director of investment strategy for Key Private Bank, citing the core year-over-year rate.

“That said, in our view, the economy maintains decent momentum but is showing potential signs of slowing for 2024,” Pietrangelo wrote in an email. “We believe the Federal Reserve is highly likely to pause interest rate hikes next week given the directional slowing of PCE inflation to wait for additional data, including the Employment Situation next Friday, to consider for the December meeting.”