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Treasury yields continue to push higher as market prices in higher fed funds

Treasury yields continued their march higher, after strong jobless claims, and as the futures market priced in a high water mark of 5% for the Federal Reserve’s rate hiking.

Jobless claims for the week ended Oct. 15 totaled 214,000, a decline of 12,000 from the week earlier and less than expected. The 10-year yield briefly touched 4.18%, before dropping back to 4.15%, the highest since 2008.

“The primary data to watch for the Fed is on the employment side,” said Greg Faranello of AmeriVet Securities. “To the extent the employment market continues to hold up, that does give the Fed the green light to do what their doing.”

The market looked past a contraction in the Philadelphia Fed’s manufacturing index, which was at -8.7%, below the Dow Jones estimate of -5%.

Faranello said the fed funds futures market is now pricing in a terminal rate, or end point, for the Fed’s rate hikes of just over 5% by the second quarter of next year.

“If you look at the charts, we’re in a little bit of a freefall right now,” Faranello said of the 10-year. Yields move opposite price.

“It’s the lack of buyers. It’s the fact the Fed has not been able to back off. It’s the pricing of the terminal rate a little above 5%,” he said. “There’s nothing in the charts that tells me we’re going to stop right here.”

Some strategists expect yields to peak sometime after the Fed’s Nov. 2 rate decision and the mid-term elections Nov. 8.

—Patti Domm