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Bond Report: 10-year Treasury yield has biggest weekly rise in more than a month after U.S. wholesale inflation report

U.S. bond yields rose on Friday, giving the 10-year rate its biggest weekly advance in five weeks, after data showed that wholesale price inflation picked up in November by more than expected.

What happened

The yield on the 2-year Treasury
TMUBMUSD02Y,
4.352%

advanced 1.6 basis points to 4.328% from 4.312% on Thursday. It rose 5 basis points this week, the largest weekly gain since the period that ended Nov. 18, based on 3 p.m. figures from Dow Jones Market Data.

The yield on the 10-year Treasury
TMUBMUSD10Y,
3.581%

was up 7.5 basis points at 3.567% versus 3.492% Thursday afternoon. It rose 6.5 basis points this week for the largest weekly gain since the period that ended Nov. 4.

The yield on the 30-year Treasury
TMUBMUSD30Y,
3.571%

climbed 9.6 basis points to 3.550% from 3.454% as of late Thursday. It declined less than 1 basis point this week. 

What drove markets

In data released Friday, U.S. producer prices rose 0.3% in November versus the 0.2% median forecast from economists polled by The Wall Street Journal. The increase in producer prices over the past 12 months slowed to 7.4% from 8.1% in the prior month, and was down from a 11.7% peak in March.

The report, which came in above expectations, indicated that there’s less moderation in price pressures than analysts had expected for last month.

Two- and 10-year Treasury yields still remain off their 52-week highs reached on Nov. 7 and Oct. 24, respectively, as investors and traders continue to anticipate that a slowdown in the U.S. economy will help push down inflation.

Markets are pricing in a 77% probability that the Fed will raise its policy interest rate by 50 basis points to a range of 4.25% to 4.50% on Dec. 14, according to the CME FedWatch tool. The central bank is mostly expected to take its fed-funds rate target to at least 4.75% to 5% by March, according to 30-day Fed Funds futures.

In other data released on Friday, the University of Michigan consumer-sentiment gauge rose to 59.1 on a preliminary basis this month from 56.8 in November. Year-ahead inflation expectations dropped to 4.6% in December, the lowest level since September 2021.

What analysts are saying

“Easing producer prices foreshadow an improving inflation environment,” said Jeffrey Roach, chief economist for LPL Financial. “The Fed will likely downshift the pace of rate hikes next week and should continue to downshift in 2023. However, the monthly increase in producer prices illustrates the need for continued tightening, albeit at a slower pace. The inflation pipeline is clearing and consumer prices will slowly move closer to the Fed’s long run target.”

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