June 17, 2024
Treasury yields hold mostly steady as traders continue to price in May rate hike

Treasury yields hold mostly steady as traders continue to price in May rate hike

Treasury yields were mostly little changed Tuesday morning as traders expressed increasing certainty of another rate increase by the Federal Reserve in May.

What’s happening
  • The yield on the 2-year Treasury note TMUBMUSD02Y, 4.232% advanced to 4.207% from 4.186% on Monday. Yields move in the opposite direction to prices.
  • The yield on the 10-year Treasury note TMUBMUSD10Y, 3.583% was 3.594%, little changed versus 3.590% Monday afternoon.
  • The yield on the 30-year Treasury bond TMUBMUSD30Y, 3.793% was up slightly at 3.811% from 3.803% late Monday.
  • The only rates demonstrating large moves were in the short end of the Treasury market. The 1-month yield TMUBMUSD01M, 3.784% declined 10 basis points to 3.889%, as did the 1-year yield, which fell to 4.798% TMUBMUSD01Y, 4.778%, according to FactSet data.
What’s driving markets

Data released on Tuesday showed that China’s economy grew by a faster-than-expected 4.5% in the first quarter, though that failed to push Treasury yields higher.

Meanwhile, traders expressed increasing conviction that evidence of easing inflation, but a resilient economy, will encourage the Fed to raise borrowing costs again next month.

Markets priced in an 86.1% probability that the Fed will raise interest rates by another 25 basis points to a range of 5% to 5.25% on May 3, according to the CME FedWatch tool. The central bank is mostly expected to take its fed-funds rate target back down to between 4.5% and 4.75% by December, according to 30-day Fed Funds futures.

In U.S. data, construction on new homes fell 0.8% in March, while building permits, a key indicator of the pace of future construction, fell 8.8% to a 1.41 million rate. Fed Gov. Michelle Bowman is due to speak at 1 p.m. Eastern time.

What analysts are saying

“With the policy rate near the zone of ‘sufficiently restrictive’ and credit conditions continuing to tighten, there are emerging signs of disagreement among Fed officials about when to pause the tightening cycle,” said researchers at Deutsche Bank led by economist Amy Yang.

“Chicago Fed President [Austan] Goolsbee delivered one of the more dovish speeches we’ve heard of late. He advocated for prudence and patience and appeared to be more cautious about further hikes…On the other hand, NY Fed President [John] Williams continued to endorse the March SEP median — which saw one more 25bps hike as a baseline — as ‘reasonable’ given continued strong inflation.”

“In our view, with the acute phase of banking stress appearing to fade (at least for the time being) and another strong inflation report, we expect the Fed to deliver a final 25bps hike and hold steady at 5.1% through year-end, before beginning to cut rates in January 2024,” the Deutsche Bank team said.

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