What are yields doing?

• The 10-year Treasury note TMUBMUSD10Y, 1.436% yields 1.394%, up from 1.342% at 3 p.m. Eastern Time on Friday, which was its lowest rate since Sept. 22.
• The 2-year Treasury note TMUBMUSD02Y, 0.635% rate stands at 0.623%, up from 0.589% at the end of last week.
• The 30-year Treasury bond’s yield TMUBMUSD30Y, 1.766% was at 1.721%, gaining from 1.675% on Friday afternoon, when it touched its lowest yield since Jan. 4.

What’s driving the market?

Concerns about omicron have driven long-dated yields lower but the compression of the Treasury curve, the differential between long-dated yields and shorter-dated ones, has continued to reflect concerns about the longer-term outlook for the economy as it tries to claw back from the COVID pandemic.

A more hawkish Fed has, however, been central to the shift in sentiment across Wall Street.

Fed Chairman Jerome Powell and other members of the central bank’s rate-setting committee have suggested, surprising markets, that a faster tapering of the central bank’s monthly asset purchases could be warranted to combat rising intensifying pricing pressures.

Concerns about the Fed making a tactical error in its newfound war against punchy inflation, which could result in the economy falling into a recession, remains one of the chief fears of bearish investors. The Fed is currently in a media blackout until the conclusion of its two-day policy gathering on Dec. 15.

Meanwhile, the U.S.’s top medical adviser Anthony Fauci said that omicron didn’t appear to produce a “great deal of severity” in cases. Questions remain about the effectiveness of the vaccines against omicron, given the number of mutations on the variant’s spike protein, the principal target of most vaccines.

Reports from South Africa, where the strain was first identified and is becoming the dominant strain, suggest that hospitalization rates haven’t increased alarmingly, according to the Associated Press.

Markets wobbled on Friday as the November nonfarm payrolls report showed a weaker-than-expected 210,000 jobs created in the month. The report was viewed as unlikely to knock the central bank from its more hawkish stance because the it contained sufficient pockets of strength to warrant tapering, setting the stage for eventual rate hikes in 2022.

The Fed and markets will likely fixate on one last piece of data before next week’s meeting of the rate-settting Federal Open Market Committee, or FOMC. A consumer price inflation report is due Friday that could draw Wall Street’s attention.

A rebound in oil prices may shift the near-term outlook for inflation, however, with West Texas Intermediate oil CL.1, 4.48%, the U.S. benchmark grade, trading more than 3% higher to start the week. Crude has been under pressure, amid the new variant because it is seen as a potential hit to global demand, driving down prices.

Oil values steadied somewhat as the Organization of the Petroleum Exporting Countries and its allies last Thursday, display some confidence in the prospects for crude, agreeing to rollover a current production policy and raise monthly overall output by 400,000 barrels per day in January, while deciding not to adjourn a key meeting to allow for further shifts in policy if needed.

What strategists are saying

“Markets are in a tough spot, and not coincidental so too is the Fed. The unavoidable tightening of financial conditions with a closing window to get out. Or at least try for the Fed,” wrote Gregory Faranello, head of U.S. rates at AmeriVet Securities, in a Monday note.