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Bond Report: Treasury yields inch back to kick off October’s final trading week

U.S. Treasury yields on Monday slipped across the board to start the final week of October, kicking off a period that will feature data on consumer confidence, gross domestic product and the Federal Reserve’s favorite inflation indicator.

Investors remain hotly attuned to rising inflation an impending reduction of monthly purchases of Treasurys and mortgage-backed securities by the Fed.

What are yields doing?

The yield on the 10-year Treasury note
TMUBMUSD10Y,
1.635%

was at 1.634%, 2 basis points lower from 1.654% at 3 p.m. Eastern on Friday. Yields and debt prices move in opposite directions.

The 2-year Treasury note yield
TMUBMUSD02Y,
0.437%

was at 0.435%, down 2.9 basis points from 0.464% on Friday afternoon, which was the latest in a string of 19-month highs for the maturity, according to Dow Jones Market Data.

The 30-year Treasury bond yield
TMUBMUSD30Y,
2.086%

fell 0.6 basis point to 2.085%, compared with 2.091% late Friday.

What’s driving the market?

Yields retreated to start the week, after rising last week.

An aggressive flattening of the yield curve — a line plotting yields across maturities — on Friday was notable, analysts said. It came after Fed Chairman Jerome Powell signaled concerns about inflation and reaffirmed expectations the central bank is prepared to begin tapering its monthly asset purchases, while also saying it was too early to begin contemplating rate increases.

Traders, however, have started to pencil in an earlier start to rate increases by the Fed in response to stubborn inflation pressures, though one in which the hiking cycle is relatively short.

Read: The Federal Reserve’s next interest rate-hike cycle is coming but may not look like what officials have been projecting

The economic calendar was all but empty Monday, but Tuesday will bring a reading on consumer confidence. Wednesday features September durable-goods orders, and Thursday offers third-quarter gross domestic product.

On Friday, September data on personal income and spending, including the Fed’s favored inflation indicator — the core personal-consumption expenditures price index — will be released.

What are analysts saying?

“Curve flattening might become the name of the game in major fixed-income markets in the very near term,” according to analysts at UniCredit.

“Accelerating coronavirus infection numbers in parts of Europe and China might accentuate downside growth and upside inflation concerns at the same time as supply bottlenecks could become even more persistent. Furthermore, idiosyncratic factors should contribute to a flattening of government bond curves in various regions,” they wrote. “In the U.S., traders seem to be anticipating the Fed lifting key interest rates before the labor market has fully recovered. Last Friday’s massive bull-flattening in reaction to Mr. Powell’s comments was telling in this regard.”

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