Bond Report: Treasury yields finish October higher on rising rate-hike expectations

Treasury yields finished October higher after the Federal Reserve hinted at a potential December rate increase earlier this week, leading investors to sell U.S. government debt in favor of assets that are perceived as riskier.

The selloff pushed Treasury prices lower and yields, which move in the opposite direction, higher.

While stock markets posted the best month in four years, short-term Treasurys, which are the most vulnerable to a potential increase in the Fed-funds rate, posted their largest monthly yield increase since February, according to Dow Jones research.

The yield on the two-year Treasury note TMUBMUSD02Y, +1.20% gained 9.1 basis points over the month and 0.8 basis point on the day to 0.736%, according to Tradeweb. One basis point is equal to one hundredth of a percentage point.

Among longer maturities, the yield on the 10-year Treasury TMUBMUSD10Y, -1.32% gained nine basis points over the month to 2.151%. On Friday it was down 2.3 basis points.

Meanwhile, the yield on the 30-year bond TMUBMUSD30Y, -1.27%  gained 4.8 basis points over the month to 2.935%. On Friday it fell 3.8 basis points.

Bond yields fall when prices rise, and vice versa.

Yields edged lower on the day on Friday after the release of slightly-weaker-than-expected economic data on U.S. consumer spending and inflation.

Consumer spending rose in September by the smallest amount since the start of the year, mainly due to a drop in gasoline prices. Meanwhile, the cost of employing the average U.S. worker also rose less than expected, offering little evidence of a broad acceleration in labor costs.

“Most of the data today establish what we knew in the wake of the September jobs report. The Fed is close to where it wants to be on its employment mandate, yet still a long way away on price stability at the 2% inflation target level,” said Chris Mier, chief strategist at Loop Capital.

The personal consumption expenditures index, the Federal Reserve’s preferred inflation barometer, rose a scant 0.2% in the past 12 months. The Fed wants to see inflation rise closer to 2% before it initiates a series of interest-rate increases. The core PCE index, which excludes food and energy, rose 0.1% in September, and was up a mild 1.3% over the past year.

On the stronger side, the Chicago business barometer rose to he highest level since January, while U.S. consumer sentiment improved slightly.

Now markets are in wait-and-see mode, gauging whether Fed Chairwoman Janet Yellen “is correct that temporary factors — oil prices, import inflation, the high value of the dollar, and weak global conditions — are temporary factors suppressing inflation readings,” Mier said.

In Europe, government bond yields finished the month lower, after European Central Bank chief Mario Draghi hinted last week that more monetary stimulus is likely next month.

On Friday, yields declined further after a report showed German retail sales stagnated last month, while inflation in the eurozone in October was unchanged from the year-ago period.

The yield on the benchmark 10-year German bond TMBMKDE-10Y, -3.16% known as the bund, lost 7.1 basis points over the month and 1.7 on the day to 0.518%.

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