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The 2-year and 10-year Treasury yields increased as investors continue to monitor cues to set the pace for 2023.
US Treasury yields rose on Friday, December 30th, as investors look ahead to the potential developments and headwinds of 2023. The benchmark 10-year Treasury yield was up nearly 2 basis points to 3.8520% during the early session. In addition, the 2-year Treasury yield climbed more than 3 basis points to 4.4009% as of 5:00 am Eastern Time.
Treasury Yields Previously Expected to Climb as 2023 Beckons
Exactly a week ago, reports also suggested that Treasury yields could rise ahead of 2023. At the time, the 10-year Treasury yield was up by a basis point to 3.6856%, with the 2-year yield remaining unchanged.
With 2020 winding down, talks of a looming recession continue to weigh heavy on investor sentiment. In addition, analysts and observers are also constantly paying attention to the Federal Reserve’s moves regarding inflation policies. The apex bank increased interest rates by 75 basis points four consecutive times this year but recently indicated it would cut back.
According to the Federal Reserve, tapering interest rate hikes is necessary to avert an inadvertent recession. In addition, key consumer price index (CPI) data suggested that inflationary pressure was over the hill and was decreasing.
Consensus Suggests that Interest Rate Hikes Could Taper
In November, the Federal Open Market Committee (FOMC) released minutes from its fiscal meeting, suggesting a hike slowdown. The document read in part:
“A number of participants observed that, as monetary policy approached a stance that was sufficiently restrictive to achieve the Committee’s goals, it would become appropriate to slow the pace of increase in the target range for the federal funds rate.”
However, earlier this month, Fed Chair Jerome Powell still called for caution, explaining that the economy was not out of the woods yet. In Powell’s opinion, although CPI optics seemed positive, the Fed still had a role to play in reining in runaway inflation. As the Fed Chair put it:
“The inflation data received so far for October and November show a welcome reduction in the monthly pace of price increases. But it will take substantially more evidence to have confidence that inflation is on a sustained downward path.”
As it stands, the Fed is widely expected to increase interest rates by 50 basis points heading into the new year. However, the US central bank also previously suggested maintaining higher interest rates throughout the following year. According to the members of the FOMC, there would likely not be any reductions until 2024.
Investors Ready to Get Behind Any Indication of Waning Inflation
Despite the Fed’s skeptical stance on inflation, investors and analysts warmly took to talks of reduced rate hikes. The reason is that any signs of tapered hikes reinforce investors’ belief that inflation could be receding. The Chicago Purchasing Managers’ Index, due Friday, should also garner investor attention. This is because the index reflects business activity in the region and could also provide further insight into 2023.
Bond markets are set to close early today and will not reopen until after the New Year’s break.