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Bond Report: 2-year Treasury yield has biggest weekly drop since July after Fed is seen as debating size of December rate hike

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The yield on the benchmark U.S. 10-year Treasury turned little changed on Friday, while rates from 3 months to 7 years out were lower, as traders digested a report by The Wall Street Journal that Federal Reserve officials are open to debating the size of December’s rate hike.

What’s happening

The yield on the 2-year Treasury
TMUBMUSD02Y,
4.508%

slipped to 4.521% from 4.608% on Thursday. Thursday’s level was the highest since Aug. 8, 2007, based on 3 p.m. figures from Dow Jones Market Data.

The yield on the 10-year Treasury
TMUBMUSD10Y,
4.217%

was 4.226% versus 4.225% Thursday afternoon. Thursday’s level was the highest since June 17, 2008.

The yield on the 30-year Treasury
TMUBMUSD30Y,
4.296%

increased to 4.319% from 4.213% on Thursday. Thursday’s level was the highest since July 28, 2011.

What’s driving markets

Traders pulled back a bit on the likelihood of another 75 basis point hike in December after The Wall Street Journal reported policy makers are likely to debate the size of December’s rate increase during their November meeting. The chance of a 75-basis-point hike in December — after factoring in a similar-size move in November — dropped to 47%, down from 75.4% on Thursday, according to the CME FedWatch Tool.

Read: Fed Set to Raise Rates by 0.75 Point and Debate Size of Future Hikes

On Friday, San Francisco Fed President Mary Daly said a benchmark fed funds rates target of 4.5% to 5% “is a very reasonable estimate” of how high rates need to go. She also said policy makers should start talking about a “step-down” from increments of 75 basis points for rate hikes, although that doesn’t mean she favors slowing down as soon as November.

Meanwhile, overseas, there’s continued uncertainty in the U.K. over who will replace Prime Minister Liz Truss, who has announced her resignation, and on whether a new fiscal plan will be unveiled on Oct. 31, just three days after a new prime minister takes office.

See also: British pound, bonds slide on further political uncertainty as retail sales disappoint

What strategists are saying

Despite investors’ reaction to The Wall Street Journal article and “the reversal of what had been a consistent climb in terminal rate assumptions, it is still too soon to rule out either a 75 bp December hike or a 5-handle finish line for the fed funds target band this cycle,” said BMO Capital Markets rates strategists Ian Lyngen and Ben Jeffery.

Market Snapshot: Dow jumps almost 750 points as stocks end higher, bond yields fall after reports Fed may shift to smaller rate hikes after November

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