Treasury yields ticked higher on Friday after a mixed set of economic data in quiet, preholiday trade.
The yield curve, a line tracing yields across all Treasury maturities, took a break from its recent flattening trend this week after tax legislation stoked fears of a pickup in inflationary pressures.
Trading closed early at 2 p.m. Eastern ahead of Monday’s Christmas holiday, on the recommendation of the Securities Industries Financial Markets Association. Markets will be closed on Dec. 25.
How are Treasurys doing?
The 2-year note yield TMUBMUSD02Y, +0.00% was up 1.4 basis point at 1.891%, contributing to a 5.4 basis point gain over the five-day period, the largest weeklong gain in five weeks.
The yield for the benchmark 10-year Treasury note TMUBMUSD10Y, +0.00% was flat at 2.486%, but climbed 13.3 basis points for the week, the biggest weeklong jump since Sep. 15.
The 30-year bond yield TMUBMUSD30Y, +0.00% was down to 2.834%, jumped 14.9 basis points this week, the sharpest weeklong climb since Nov. 10.
Bond prices move inversely to yields.
What’s driving markets?
Fears that the tax legislation would spark inflation in an economy at full employment has helped push up long-dated yields, steepening the yield curve, analysts said. The gap between the 10-year yield TMUBMUSD10Y, +0.00% and the 2-year yield TMUBMUSD02Y, +0.00% one way to gauge the curve’s slope, widened by 7.9 basis points this week. That marked a pause in a weekslong trend of curve flattening.
Investors shed Treasurys to avoid the corrosive impact of stronger price pressures, while traders betting on the curve to flatten were caught offside. That forced speculators and short-term investors to unwind their bullish bets and may have strengthened the selloff. But some said the delayed reaction to the tax bill was puzzling as market participants had already raised the odds of the legislation’s passage before this week to little response in the bond market. Trump signed the bill into law on Friday.
See: Steepening yield curve slams one of the bond market’s biggest bets
Traders contended with a raft of first-tier economic data on Friday. Core measures for personal consumption expenditure, which strip out for food and oil prices, rose 0.1%, as expected. The figures could paint a clearer outlook for fourth-quarter growth and help analysts see whether inflation will perk up from its recent weakness soon.
That’s important because the Federal Reserve needs a string of strong inflation readings to give the headroom it needs to raise rates further in 2018, which could be bearish for bonds.
Read: Consumers spent their savings in November
What are market participants saying?
“We anticipate that a rebound in core inflation next year will prompt the Fed to step up the pace of policy tightening and deliver four rate hikes in 2018,” wrote Michael Pearce, senior U.S. economist for Capital Economics.
What else is on investors’ radar?
Congress passed a stopgap funding bill on Thursday to keep the government lights on until mid-January.
Durable goods orders rose 1.3% in November. Economists polled by MarketWatch had expected 2% gain. Despite the weaker-than-expected data, economists are still expecting an impressive finish to the year, after third-quarter GDP stood at 3.2%. New homes sales jumped 17.5% to an annual rate of 733,000 in November, while consumer sentiment slipped to 95.9 in December from 98.5 in the previous month.