By Sunny Oh

The spread between the 2-year yield and the 10-year yield fell to 0.62 percentage point, a decade low

Long-dated Treasury yields fell while short-dated yields rose Friday as investors added to bets that the Federal Reserve will raise rates more than the market has so far anticipated next year.

The day's action encapsulated the weekly trading which saw the spread between the 2-year note yield and the 10-year note yield reach a decade low.

What are yields doing?

The 10-year Treasury note yield fell a basis point to 2.352%, and slipped 4.4 basis points this week. Meanwhile, the 30-year bond yield fell 1.4 basis point, contributing to an 8.6 basis point decline in the five-day period.

Short-dated yields continued their impressive ascent. The 2-year note yield rose 1.7 basis points to 1.729%, a 10-year high. That contributed to a 7.1 basis points jump over this week, the biggest weekly climb since Oct. 20.

Bond prices move in the opposite direction of yields

What's driving the market?

The yield curve, a line tracing yields across maturities, has flattened as traders bought long-dated securities and sold short-dated securities on the belief that the Federal Reserve would raise rates more than investors thought. The spread between the 2-year note and the 10-year note, one gauge of the yield curve's slope, fell to 0.62 percentage point, the lowest since Sep. 2007.

As growth gathers momentum, investors are concerned the central bank will deliver the three to four interest rates even though the inflation backdrop remains lackluster.

Part of the curve's flattening move has been helped by the U.S. economy notching a spree of solid economic readings this week. Industrial production notched a stellar 0.9% rise in October (http://www.marketwatch.com/story/industrial-production-surges-in-october-tops-forecast-2017-11-16), suggesting manufacturers were picking up steam. Friday's housing starts number could help add to this bullish undertone and strengthen the Federal Reserve's case for raising interest rates in December. That could give the 2-year yield impetus to travel higher.

Most investors were still keeping a steady eye on the tax bill, seen as at least a partial driver of the stock's market's gains and some of the bond market's losses. The House passed their version of the bill on Thursday. Treasurys, however, have remained resilient to the slow progress of the Republican plan to overhaul the U.S. tax code as market participants still held doubts about the Senate's ability to pass a comprehensive tax bill.

See: Republican Ron Johnson opposes current Senate tax bill (http://www.marketwatch.com/story/republican-ron-johnson-opposes-current-senate-tax-bill-2017-11-15)

Read: Corker worries over true cost of 'temporary' cuts in tax bill (http://www.marketwatch.com/story/corker-worries-over-true-cost-of-temporary-cuts-in-tax-bill-analyst-sees-democratic-wave-in-polls-2017-11-17)

What are analysts saying?

"Investors are finally getting it, inflation is likely to stay benign," said Jason Thomas, chief investment officer at Savos Investments, a division of AssetMark. That has made owning longer-maturity debt attractive even as rates ratchet up higher. The combination of the two factors has been responsible for flattening the yield curve, said Thomas.

"The bigger test, of course, will come in the Senate, but that chamber's vote is now not likely to take place until after next week, thus giving the Finance Committee much more time to try to address various concerns about the bill," said Thierry Wizman, global interest rates and currencies strategist for the Macquarie Group.

What's on investor's radar?

Housing starts jumped 13.7% in October (http://www.marketwatch.com/(S(rnrsydaynixa5x55oiibxm45))/story/housing-starts-booms-137-in-october-2017-11-17), or an annual rate of 1.29 million, the fastest pace in a year. Economists surveyed by MarketWatch expect it to climb to 1.2 million from a September reading of 1.127 million, which was later revised up to 1.135 million.

(END) Dow Jones Newswires

November 17, 2017 16:23 ET (21:23 GMT)

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