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Bond Report: 2-year Treasury yield hits fresh 52-week high, with traders factoring in tighter Fed policy even as U.S. third-quarter GDP slows

Treasury yields rose on Thursday, with the 2-year rate surging to another 52-week high, as traders factored in tighter monetary policy from the Federal Reserve and yield curves continued to flatten from the U.S. to the U.K. and Australia.

What are yields doing?

The yield on the 10-year Treasury note

rose 4 basis points to 1.568%, up from 1.528% at 3 p.m. Eastern on Wednesday. It was the largest one-day gain since Oct. 19 based on 3 p.m. levels, and snapped a losing streak that lasted four trading days, according to Dow Jones Market Data.

The 2-year Treasury note yield

rose less than 1 basis point to another 52-week high of 0.499%, up from 0.491% Wednesday afternoon. The 2-year yield is at its highest level since March 18, 2020.

The 30-year Treasury bond yield

edged up 2 basis points to 1.962% from 1.942% late Wednesday. It was the largest one-day gain since Oct. 20, and snapped a four-trading-day losing streak.

What’s driving the market?

Yield curves continued to flatten across bond markets from the U.S. to the U.K. and Australia on Thursday, as traders and investors readjusted their expectations for when central banks might raise policy rates in the face of an uncertain outlook. More central banks are expected to start lifting borrowing costs in the next year, given persistently high inflation.

The moves were especially pronounced in the U.K., where the spread between 5- and 30-year government debt yields flattened on Thursday to the narrowest level since at least 2008, according to data from Tradeweb. Meanwhile, the counterpart U.S. and Australian spreads were at their narrowest levels, respectively, since March and April of 2020.

Read: Bond market yield curve flattening continues as U.S. growth slows, while ECB’s Lagarde pushes back on rate-hike expectations

With Federal Reserve officials widely expected to begin tapering their monthly bond purchases soon, investors have pulled forward expectations for when policy makers might raise interest rates. Traders are pricing in around two Fed rate hikes by next year, compared to the single 25 basis-point increase envisioned by policy makers in their most recent rate projections.

Meanwhile data released Thursday showed U.S. gross domestic product slowed sharply to a 2% annualized rate in the third quarter, down from a 6.7% rate in the April-June quarter. It was the slowest growth rate since the 2020 recession. However, initial jobless claims fell to a new pandemic low of 281,000 for the week ended Oct. 23, as the labor market continued to recover.

Overseas, the ECB’s Lagarde pushed back on market expectations for rate hikes by her bank starting in 2022, by saying that the conditions for raising rates are unlikely to be met in the timeframe envisioned by the markets.

As expected, the ECB left its monetary policy measures unchanged on Thursday, saying it would continue to purchase assets under its pandemic emergency purchase program at a somewhat slower pace than seen in the second and third quarters. The central bank also left its policy interest rates unchanged.

In Washington politics Thursday morning, President Joe Biden unveiled a framework for a $1.75 trillion social-spending package, as he met with House Democratic lawmakers at the U.S. Capitol.

What are analysts saying?

“The global flattening of the yield curve will remain thematic in the coming weeks,
as market participants adjust to the realities of a more hawkish international monetary policy skew,” said Ian Lyngen, head of U.S. rates strategy for BMO Capital Markets.

The moves are coming at a time of increasing uncertainty about the strength of the economic recovery, “and there’s more repricing to be done, but it’s not going to be in a straight line,” Lyngen said via phone Thursday. “It will be choppy. There will be moments of tactical re-steepening as we push flatter.”

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