Treasury yields declined on Friday, moving off multiyear highs, as demand for U.S. debt increased following an sharp Federal Reserve-inspired selloff earlier in the week.
The yield on the 10-year TMUBMUSD10Y, -0.76% shed 2.8 basis points to 2.577%, while the two-year yield TMUBMUSD02Y, -1.51% shed 1.9 basis point to 1.257%. The 30-year TMUBMUSD30Y, +0.03% slipped two points to 3.142%. Bond yields move inversely to prices.
The Fed raised interest rates on Wednesday for the second time in a decade. The hike was widely anticipated, but a subtle shift in the Fed’s interest-rate projections surprised some investors, sparking a dramatic selloff in Treasury bonds.
A plurality of Fed policy makers now anticipate three interest-rate hikes in 2017, compared with two hikes in forecasts released in September.
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There is some debate about whether the Fed’s tone was sufficiently hawkish to warrant pricing of a more aggressive path of interest-rate hikes in 2017. Fed Chairwoman Janet Yellen said most Fed policy makers didn’t incorporate their expectations for President-elect Donald Trump’s fiscal policies into their projections. Others have played down the significance of the shift in the dot plot, arguing that several of the Fed’s most-hawkish policy makers are losing their voting powers come the new year.
“The upward moves in the Fed dots and rising implied rates are an ominous signal for real USD rates. Yet many investors still cling to the idea that the market moves are too much, too far and too fast,” said a team of fixed-income strategists at Société Générale in a research note published Friday.
Trump’s team has advocated for expansionary fiscal policies, like tax cuts and infrastructure spending, that would increase the deficit, forcing the Treasury to issue more bonds. But details about the size and scope of Trump’s policies, as well as the timeline for pushing them through Congress, remain vague.
“It’s tough to hang your hat on any one tenant, from tax reform, to infrastructure spending to the success these policies might have in generating growth,” said Gary Pzegeo, managing director at Atlantic Trust.