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Bond Report: 2-year Treasury yield bounces off 3-month low

Treasury yields ticked higher Friday, with the rate on the policy sensitive 2-year note bounding off a three month low set the previous session after data showed U.S. inflation continued to cool in December.

What yields are doing

The yield on the 2-year Treasury note

rose 3.7 basis points to 4.165% after ending the U.S. session Thursday at its lowest since early October.

The 10-year Treasury note yield

rose 4 basis points to 3.488%.

The yield on the 30-year Treasury bond

was up 4.5 basis points at 3.627%. Yields on 10-year notes and 30-year bonds ended Thursday at their lowest since mid-December.

Market drivers

Yields have fallen, led by shorter maturities, as data has fueled expectations for the Federal Reserve to downshift the size of its rate hikes in 2023.

The December consumer price index on Thursday showed inflation continued to cool in line with forecasts, while Philadelphia Federal Reserve Bank President Patrick Harker said it would likely be appropriate for the central bank to lift rates in increments of 25 basis points, or a quarter of a percentage point. The Fed last year delivered a several super size 50- and 75-basis-point increases.

The University of Michigan’s preliminary January consumer-sentiment index is due at 10 a.m. Eastern. The data includes a gauge of consumer inflation expectations.

U.S. markets will be closed Monday for the Martin Luther King Jr. Day holiday.

What analysts say

“With both the headline and core U.S. inflation readings matching consensus expectations exactly, swings in bond markets were muted. However, they gathered steam as more FOMC participants raised the likelihood of just a 25bp (basis point) rate hike at the next meeting,” said analysts at UniCredit Bank, in a Friday note.

“There are now two 25bp rate hikes priced in for the next two meetings, with the possibility of a third 25bp hike in 2Q23 already considered too close to call,” they wrote.

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