Yields on 7-year Notes Held Mostly Steady Ahead of Auctions

During Tuesday morning trading, Treasury yields displayed a mixed performance in anticipation of a $39 billion auction of 7-year notes scheduled later in the session.

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In terms of specific movements:

• The yield on the 2-year Treasury, represented by BX:TMUBMUSD02Y, experienced a 5 basis points decrease, sliding from 4.892% on Monday to 4.842%.
• The yield on the 10-year Treasury, represented by BX:TMUBMUSD10Y, remained unchanged at 4.388%, maintaining its level from Monday's 3 p.m. Eastern time.
• The yield on the 30-year Treasury, represented by BX:TMUBMUSD30Y, advanced by 1.1 basis points, rising to 4.544% from Monday's figure of 4.533%.

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The focal point for market participants was the upcoming Treasury auction of 7-year notes, valued at $39 billion, scheduled for 1 p.m. Eastern time. This followed a somewhat disappointing auction of two-year notes amounting to $54 billion on Monday and a more robust $55 billion auction of five-year maturities.

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The recent decline in yields witnessed over the past few weeks has been driven by optimism surrounding the belief that receding inflationary pressures imply that the Federal Reserve has concluded its tightening cycle. The validity of this narrative faces a significant examination on Thursday, with the impending release of the PCE inflation report for October.

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In data disclosed on Tuesday, an S&P Case-Shiller index revealed that home prices in the 20 largest U.S. metropolitan areas reached a record high in September, underscoring a persistent scarcity of available properties for sale. Additionally, the U.S. consumer-confidence index exhibited an increase to 102.0 in November, up from the previous 99.1.

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Market sentiment, as reflected in the CME FedWatch Tool, indicates a 94.1% probability that the Federal Reserve will maintain interest rates within the range of 5.25%-5.5% on December 13. Looking ahead to January, there is an 88.2% likelihood of no action. The probability of a 25-basis-point rate cut in the subsequent March meeting is estimated at 24.7%, a decline from the 29.4% recorded a week earlier.

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Analyst Perspectives:David Donabedian, Chief Investment Officer of CIBC Private Wealth US, managing assets totaling $100.7 billion, expressed optimism regarding the outlook for inflation. He emphasized a more positive stance on inflation compared to the growth outlook. Donabedian anticipates the predominant economic influence to be the delayed anti-growth impact resulting from the Federal Reserve's interest rate hikes and other monetary tightening measures. He foresees a scenario where growth in 2024 is weaker than in any of the three preceding years, with the possibility of a recession still on the horizon.

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Despite this, the combination of declining inflation and a less robust economic environment is expected to create conditions conducive to the Federal Reserve commencing interest rate reductions next year. The timing and magnitude of such adjustments will be contingent on whether the economy experiences a downturn or merely takes a pause.

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