Bond Report: U.S. Treasury yields rise for second straight month

U.S. Treasury yields end November with gains for a second consecutive month amid heightened expectations that the Federal Reserve is likely to begin increasing interest rates at its December meeting.

Two-year Treasury yields posted their largest monthly gain since March 2010.

Monday’s action was largely muted, however, with yields ending the session little changed as investors await several major data reports and events this week, including the European Central Bank’s policy meeting and the U.S. November monthly jobs report later this week.

See: U.S. Treasurys lag behind in November as investors brace for rate hike.

Analysts noted low trading volumes in the absence of market-moving data releases.

The 10-year benchmark Treasury yield TMUBMUSD10Y, -0.51% was off by 0.2 basis point at 2.220% and gained 7 basis points over the month.

The yield on the 30-year bond TMUBMUSD30Y, -0.77% fell 0.9 basis point to 2.991%. One basis point is equal to one hundredth of a percentage point. Yields move inversely with debt prices.

The yield on the two-year Treasury note TMUBMUSD02Y, +2.16% was 0.1 basis point higher at 0.934% on Monday and has risen 20 basis points over the month.

Short-dated bond yields, which are the most sensitive to changes in official interest rates, have been rising since mid-October, with the 2-year note hitting five-year highs, as markets are pricing in a liftoff in December.

The market-implied probability of a December rate increase was at 78% according to the CME Group’s FedWatch tool, which tracks Fed-funds futures prices.

Economic Preview: November jobs report likely to give Fed go-ahead to raise interest rates.

“While there is a high probability of a rate hike in December, it is too simplistic to assume it as given,” said Guy LeBas, fixed income strategist at Janney.

“It is our view there will be three rate hikes between now and the end of 2016 and if the first one is indeed in December, then, the next two will be far apart,” LeBas said.

The ECB’s policy members meet Thursday, and investors largely expect the central bank to unveil a fresh round of easing measures. That is likely to further depress long-dated bond yields in Europe .

“The ECB’s easing won’t provide any deterrent for the Fed to tighten later in the month and on the margin Europe picking up the mantel of global-easing provides some cover for the Fed to act,” wrote analysts at CRT Capital.

Monday’s economic news include the Chicago PMI, or business barometer, which fell back into contraction territory, and pending-home sales, which edged up 0.2%. However, market reaction to those reports was muted.

In Europe, yields on long-dated eurozone government bonds were higher. The yield on the benchmark 10-year German bond TMBMKDE-10Y, +3.01% known as the bund, rose 2 basis points to 0.473%. All maturities on German government bonds up to a 7-year bond now have negative yields in anticipation of those fresh ECB measures.

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