Treasury yields steadied Friday after a volatile week that saw the benchmark 10-year yield hit four-year highs and U.S. stocks post their worst week in two years.
The benchmark 10-year Treasury yield rose to near 2.85 percent in afternoon trading after earlier dropping to 2.788 percent. On Thursday, the yield came close to a four-year high of 2.885 percent that had helped trigger Monday's stock market sell-off. Bond yields move inversely to prices.
"It's about finding new ranges relative to the stock markets and about liquidity," said Lee Ferridge, North American head of macro strategy for State Street Global Markets. He said the Federal Reserve's balance sheet reduction —an unwind of massive stimulus implemented in the wake of the financial crisis — was playing a greater role in markets than perceptions of future rate hikes.
Bets on fewer rate hikes played out more in shorter-dated Treasurys. The rate-sensitive traded lower near 2.06 percent after falling earlier to just above 2 percent.
"Any more weakness in stocks may have some believing it will slow the Fed's rate increases," said Bryce Doty, senior vice president of Sit Fixed Income Advisors.
As measured by CME's fed funds futures, the probability of a June rate hike fell below 50 percent from near 55 percent a week ago. Markets were still expecting a quarter-point hike in March.
U.S. stocks overcame a sharp intraday drop to close more than 1 percent higher Friday. But the S&P 500 and Dow Jones industrial average each fell more than 5 percent for the week, their worst since January 2016.
Treasurys
"Short-term we've begun to see a little bit of conflict, whether bond markets go down or go up [with stocks]," said Robert Tipp, chief investment strategist at PGIM Fixed Income. Tipp added that a major event for the week was to see how markets handled new supply of bonds.
"If you get a little outperformance at the back end of the market that may be a good sign that maybe the markets are hitting a clearing level," he said.
The yield on the 30-year Treasury bond traded higher near 3.16 percent, after hitting Thursday a high of 3.168 percent, its highest level since March 15.
In economic news, U.S. wholesale inventories rose a more-than-expected 0.4 percent in December.
"Quite honestly, getting to 3 [percent] or a little higher wouldn't be surprising to us" on the 10-year yield, said Craig Bishop, lead strategist, U.S. Fixed Income Strategies Group at RBC Wealth Management. But "at this point it'll take another piece of economic data to do that."
"At current levels with Treasurys the yields aren't significantly higher enough to cause a big shift from equities into bonds," Bishop said, noting that level for him stands around 3.75 percent or 3.5 percent. "There's a lot of activity, a lot of noise, but our view on rates hasn't changed. We don't expect a significant spike in rates."
Volatile trading continued across markets worldwide. Asian stocks dropped Friday, with the Nikkei 225 falling more than 2 percent. Major European stock markets closed more than 1 percent lower.
On Thursday, U.S. stocks finished deep in the red with the S&P 500 officially in correction territory, or more than 10 percent from a recent high, as higher interest rates continued to weigh on sentiment.
The Dow Jones industrial average finished the session down 1,032.89 points at 23,860.46 — also entering correction territory. In addition, developments in the political space have been keeping investors on edge.
It became apparent late Thursday that parts of the U.S. government would be entering a shutdown, after the Senate failed to secure the passing of a spending bill by the midnight deadline.
During Friday's early hours, however, the Senate managed to pass a short-term funding bill, paving the way for an increase in military and domestic spending. The House also decided to pass the bill and send it to President Donald Trump for it to be signed — helping end the brief government shutdown.
No U.S. Treasury auctions or Federal Reserve policymaker speeches are scheduled for Friday.
—CNBC's Jacob Pramuk contributed to this report