U.S. Treasury prices advanced on Friday, with the short end of the yield curve leading the gains. This movement followed the U.S. Department of Justice concluding its investigation into cost overruns related to the Federal Reserve's building renovations, a development that may pave the way for Kevin Warsh to assume the role of Fed Chair. Early trading saw futures exhibit volatility, but they subsequently found support from a decline in oil prices, driven by increasing optimism about the prospect of negotiations between the United States and Iran.
Short-term yields fell by as much as 6 basis points shortly after 3 p.m. New York time, with the 2-year yield closing near its daily low. Gains were led by the short and intermediate segments of the curve, causing the 2s10s and 5s30s spreads to widen by approximately 4 basis points and 4.5 basis points for the session, respectively. The 10-year Treasury yield settled around 4.3%, down about 2 basis points from Thursday's close.
WTI crude futures declined by 1.5%, providing support for the rally in Treasuries. The drop in oil prices stemmed from market expectations that U.S.-Iran talks might materialize, as U.S. envoys Steve Witkoff and Jared Kushner were scheduled to depart for discussions on Saturday.
A dovish shift in overnight index swaps (OIS) tied to Federal Reserve meeting dates bolstered the short end of the yield curve. This followed reports that U.S. Attorney Jeanine Pirro stated her office would close its investigation into the costs of the Federal Reserve building project. By the market close, pricing for the December policy meeting implied approximately 11 basis points of rate cuts, compared to around 4 basis points at Thursday's close.
Trading volume in U.S. Treasury futures was about 25% higher than the 20-day average as of 3 p.m. New York time. Volume in SOFR futures was 20% to 40% above usual levels.
As of 4:16 p.m. Eastern Time, the 2-year Treasury yield had decreased by 5.3 basis points to 3.7804%. The 5-year Treasury yield had fallen by 4.1 basis points to 3.9185%. The 10-year Treasury yield had declined by 1.9 basis points to 4.3056%. The 30-year Treasury yield had increased by 0.2 basis points to 4.9132%. The yield spread between 5-year and 30-year Treasuries widened by approximately 4.3 basis points to 99.3 basis points. The yield spread between 2-year and 10-year Treasuries widened by approximately 3.9 basis points to 52.31 basis points.
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