Bond Report: 10- and 30-year Treasury yields end November with biggest monthly declines in two to three years

What’s happening

• The yield on the 2-year Treasury
  TMUBMUSD02Y,
  4.330%
  dropped 9.9 basis points to 4.372% from 4.471% on Tuesday. For the month, it fell 12.7 basis points, the largest one-month decline since May, based on 3 p.m. figures from Dow Jones Market Data.

• The yield on the 10-year Treasury
  TMUBMUSD10Y,
  3.656%
  fell 4.7 basis points to  3.699% from 3.746% Tuesday afternoon. It fell 37.5 basis points in November,  the largest one-month decline since March 2020.

• The yield on the 30-year Treasury
  TMUBMUSD30Y,
  3.761%
  was up 2 basis points at 3.821% versus 3.801% late Tuesday. For the month, it declined 38.2 basis points, the largest one-month decline since August 2019.

What’s driving markets

Two- through 20-year yields slipped on Wednesday after Powell said “the time for moderating the pace of rate increases may come as soon as the December meeting” in two weeks.

Investors focused on the seemingly dovish aspect of Powell’s comments and seemed to pay less attention to the chairman’s efforts to balance his message, by also saying that the ultimate level of Fed fund rates would have to be higher than previously thought a few months ago. His remarks, for instance, halted the 1-year Treasury bill rate’s rise toward 5%.

Read: Treasury-bill market’s march toward 5% gets interrupted by Fed’s Powell

The Fed’s Beige Book report released on Wednesday showed that the U.S. economy grew steadily through the fall as inflation eased a bit, though many businesses expressed “greater uncertainty or increased pessimism” about the outlook toward the end of the year.

In data releases, updated figures revealed that the U.S. economy grew 2.9% in the third quarter, with little sign of recession for now, and appears to be on track to expand again in the final months of this year. The economy is forecast to expand in the fourth quarter, or from October to December, but estimates vary from as much as 4% to less than 1%. Those figures are adjusted for inflation.

Meanwhile, private-sector job growth slowed to its lowest level since early 2021, Chicago factory activity fell deeper into contraction territory in November, and U.S. pending home sales dropped for a fifth straight month in October. In addition, U.S. job openings fell to 10.3 million in October from 10.7 million previously.

Markets are pricing in a 77% probability that the Fed will raise interest rates by 50 basis points to a range of 4.25% to 4.5% on Dec. 14, and a 23% chance of another 75-basis-point hike, according to the CME FedWatch tool. The central bank is mostly expected to take its fed-funds rate target to at least between 4.75% and 5% by March.

What analysts are saying

“While taking a slightly more dovish tone than his comments following the November press conference, Powell walked a fine line between indicating a likely softening in the pace of future rates hikes and reiterating that the Fed’s fight against inflation is far from over,” said Stifel, Nicolaus economists Lindsey Piegza and Lauren Henderson. They described Powell as signaling “smaller increments to an ultimately higher level of rates.”