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Yields Decline as Odds of 2019 Hikes Drop

Treasury yields continued to fall this week, as declines on longer-dated bonds led to a slight inversion of the curve between the three-and five-year tenors.  That move sent up alarm bells across the market, igniting fear that the curve will invert further, signaling an oncoming recession.  The pressure on yields was primarily due to the market's reassessment of likely monetary policy next year. 

Although the FOMC indicated that three 2019 25 bp hikes were likely following their September meeting, comments from policymakers since then have caused Fed funds futures to now price in only one such hike.  Additional clarity should be forthcoming following the FOMC's 12/15 meeting, where another 25 bps rate hike is expected. 

The economic calendar was highlighted by Friday's payrolls report which showed that 155,000 jobs were added in October while wages rose by 3.1% on an annualized basis.  Both measures were reasonably strong, however slightly below expectations.

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