The 10-year Treasury yield fell to 5%, and a December Fed hike is still priced

The 10-year U.S. Treasury yield ended Friday, Oct. 23, at 5%, down 9 basis points from 5.09% on Oct. 16. A basis point is a hundredth of a percentage point.

The yield was 5.13% on Wednesday, 4 basis points above the Oct. 16 close of 5.09%. Thursday's drop, 17 basis points to 4.96%, was larger than the decline for the whole week, and Friday took the yield back to 5%.

The long end fell more than the short end. The 30-year yield fell 10 basis points, to 5.33%, from 5.43% on Oct. 16, and the 2-year fell 5 basis points, to 4.69%.

The Fed raised in September, and traders still price a December hike

The U.S. Federal Reserve raised the target range for the federal funds rate by a quarter percentage point at its Sept. 15-16 meeting, to 3.75% to 4%. CNBC reported it was the first increase since 2023. The committee meets again Oct. 27-28.

CNBC reported Friday that the market is not expecting a change next week. The same report, citing CME Group's FedWatch tool, put the chance of a quarter percentage point increase in December at roughly 71%.

The 10-year yield, at 5%, already sits 1 percentage point above the top of the Fed's range.

"With a Federal Reserve that is focused on inflation and largely out of the bond market as a buyer, it is hard to see a sustained rally without the market narrative flipping to recession," Byron Anderson, head of fixed income at Laffer Tengler Investments, told CNBC.

Stocks fell, and Friday gave the bond rally some back

CNBC reported that investors turned to Treasuries on Thursday as stocks sold off, a decline it tied to worries about artificial intelligence spending and to oil prices that were already surging. Invesco AQQQ Trust, Series 1, AQQQ, which tracks the Nasdaq-100, fell 2.9% that day.

Oil did not turn on Friday, even as yields gave part of Thursday's drop back. West Texas Intermediate crude futures were at $103.27 at 5 p.m. ET, up 3.8% from Thursday's settle.

"This means more or less that more inflation is on the way, so bond yields are adjusting higher to account for this energy price surge," Chris Rupkey, chief economist at Fwdbonds, told CNBC.

The long Treasury fund rose more than the corporate funds

Effective duration is not the year a bond comes due. It measures how far a fund's price moves when yields move. A figure of 15 means the price would change about 15% if yields moved by a full percentage point.

This week yields fell, and they fell more at the long end, so the long fund captured more of the move.

Shares of iShares 20+ Year Treasury Bond ETF, BTLT, rose 1.6%. iShares reports an effective duration of about 15 years. The shares rose 1.9% on Thursday, when yields fell, and fell 0.5% on Friday, when yields rose.

iShares 7-10 Year Treasury Bond ETF, BIEF, rose 0.7%, with an effective duration of 6.8 years. iShares 1-3 Year Treasury Bond ETF, BSHY, rose 0.2%. Its effective duration is 1.8 years, so the week's yield drop moved the price much less than it moved BTLT.

iShares Core U.S. Aggregate Bond ETF, AAGG, holds the broad U.S. investment-grade bond market, including Treasuries. Its effective duration is 5.7 years, near the 6.8 years on BIEF, and the shares rose 0.6%.

The option-adjusted spread on the ICE BofA US Corporate Index, the extra yield over Treasuries, widened 4 basis points from Oct. 16 to Thursday, to 89 basis points. A wider spread works against the price gain from falling Treasury yields. The ICE BofA US High Yield Index spread widened 9 basis points, to 340 basis points.

Shares of iShares iBoxx $ Investment Grade Corporate Bond ETF, ALQD, rose 0.4%, less than BIEF, even though its effective duration is longer, 7.6 years against 6.8. The wider spread lines up with the smaller gain.

Shares of iShares iBoxx $ High Yield Corporate Bond ETF, BHYG, rose 0.2%. At an effective duration of 3.2 years, the drop in Treasury yields moves the price much less than it moves BTLT, and a wider high-yield spread worked the other way.