TREASURIES-Ten-year bond yields set for biggest monthly drop since 2008

BY Reuters | TREASURY | 11/30/23 04:54 AM EST

LONDON, Nov 30 (Reuters) - U.S. Treasury yields held around their lowest in around two months on Thursday and 10-year yields were heading for their biggest one-month fall since 2008, as investors are increasingly convinced that interest-rate cuts could be just months away.

The benchmark 10-year note yield has fallen by 60 basis points in November, as prices have soared, logging its biggest one-month drop since a 70-bps fall in December 2008, when the Federal Reserve slashed interest rates in response to a struggling economy and a distressed financial system.

Yields were last up 1 bp at 4.28% in European trading.

The U.S. economy has shown far more resilience than most expected - creating more jobs, maintaining spending and activity and all during 17 months of almost non-stop rate rises from the central bank to lower inflation.

Consumer price pressure are abating fast, spending is holding up and there has been enough evidence in the data to suggest the economy is heading for a gentle slowdown rather than recession.

In the space of a month, markets have shifted from an expectation for rates to fall by around 60 bps in the second half of the year to pricing a scenario in which the Fed will cut rates by a full percentage point by this time next year, with the possibility of the first drop as early as March.

"When it comes to market pricing, a Q1 rate cut has gone from being a complete out-of-consensus view only a month ago, to a serious proposition now. It will be fascinating to see what Mr Powell makes of all this tomorrow," Deutsche Bank strategist Jim Reid said.

Fed Chair Jerome Powell takes part in a discussion on Friday at Spelman College in Atlanta.

Traders will scour his remarks for any hint that the rally in bonds could be justified.

Shorter-dated yields have also dropped in November, but by far less. Yields on the two-year note, typically the most sensitive to shifts in investor thinking about the policy outlook, have fallen by 42 bps, the most since a 73-bp drop in March this year.

This has punished the dollar, which has slid by 3.4% - the most in a year this month against a basket of currencies - and driven the S&P 500 to its strongest monthly performance since July 2022, with a gain of 8.5%.

Two-year note yields were last flat on the day at 4.65%.

Data out later on Thursday on consumer spending and price pressures could confirm the belief among investors that U.S. rates are about to tilt lower. (Reporting by Amanda Cooper; Editing by Dhara Ranasinghe)

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

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