2-year Treasury yield jumps by most in a week, with U.S. economic strength in focus

What’s happening

• The yield on the 2-year Treasury
  BX:TMUBMUSD02Y
  jumped 4.3 basis points to 5.103% from 5.060% on Monday. That’s the largest one-day advance in a week, according to 3 p.m. Eastern time figures from Dow Jones Market Data.

• The yield on the 10-year Treasury
  BX:TMUBMUSD10Y
  rose less than 1 basis point to 4.84% from a one-week low of 4.836% Monday afternoon.

• The yield on the 30-year Treasury
  BX:TMUBMUSD30Y
  declined 2.5 basis points to 4.963% from 4.988% late Monday. Tuesday’s 3 p.m. level is the lowest for the 30-year rate since Oct. 17.

What drove markets

Two- through 30-year yields finished mixed after having been broadly higher earlier in the day as traders initially focused on the outlook for U.S. politics and the lack of major escalation in the Middle East war.

The militant group Hamas released two hostages on Monday as Israel ramped up airstrikes and didn’t proceed with a ground assault yet. Oil settled lower for a third straight session on Tuesday, with supplies unaffected by the war so far.

Back in the U.S., Republicans voted for Rep. Tom Emmer of Minnesota to become their latest nominee for speaker of the U.S. House of Representatives, a selection that comes three weeks after the historic ouster of Kevin McCarthy.

Data released on Tuesday showed the economy getting off to a good start in the fourth quarter. The S&P U.S. services purchasing managers index for October rose to a three-month high of 50.9 for October, while the manufacturing PMI climbed to a six-month high of 50.

See: Economy gets off to good start in the fourth quarter, S&P finds

Meanwhile, Treasury’s $51 billion auction of 2-year notes produced average results.

Markets priced in a 99.7% probability that the Fed will leave interest rates unchanged between 5.25%-5.5% on Nov. 1, according to the CME FedWatch Tool. The chance of a 25-basis-point rate hike to a range of 5.5%-5.75% by the subsequent meeting in December is now priced at 25%, down from 38.5% a week ago.

What analysts are saying

“With the pre-FOMC silent period underway and a light data calendar the first half of the week, political developments and coupon auctions are the most likely culprits for significant changes in the Treasury market before the Q3 GDP release Thursday,” said Will Compernolle, macro strategist at FHN Financial in New York.

“Israel’s ground invasion of Gaza that felt imminent has still not happened, reversing some flight-to-safety trades the last couple weeks, but the risk of escalation will still be in the spotlight for the foreseeable future,” he wrote in a note. “The U.S. House of Representations is going on three weeks without a permanent speaker, no Republican representative is breaking through as likely to get the requisite number of votes, and a potential mid-November government shutdown looms over the whole process.”