Treasury yields hold steady after mixed housing data, second debt-ceiling meeting

What happened

• The yield on the 2-year Treasury 
  TMUBMUSD02Y,
  4.130%
  was up slightly at 4.085% from 4.072% on Tuesday.

• The yield on the 10-year Treasury 
  TMUBMUSD10Y,
  3.549%
  slipped to 3.523% from 3.548% on Tuesday, when it reached the highest level since May 1.

• The yield on the 30-year Treasury
  TMUBMUSD30Y,
  3.856%
  traded at 3.844%, down from 3.871% late Tuesday, when it reached the highest level since March 8.

What’s driving markets

Data released on Wednesday showed U.S. construction of new homes rose 2.2% in April, to a 1.4 million annual pace, roughly matching economists’ expectations on Wall Street. However, building permits, a sign of future construction, fell 1.5% to a 1.42 million rate.

Meanwhile, investors remained focused on developments from the latest round of debt-ceiling discussions. On Tuesday, House Speaker Kevin McCarthy referred to the talks as “a little more productive.” The Biden White House referred to those discussions as “productive and direct.”

Market attention now also turns to Friday’s scheduled appearance by Federal Reserve Chairman Jerome Powell for possible new guidance on interest rates.

Some analysts are considering the possibility that the economy may be stronger than originally thought, after Tuesday’s data showed a slight rebound in U.S. retail sales for April and industrial production rose after two flat months.

Read: ‘Survival of the strongest’: How pandemic-era shifts may upend market’s recession narrative

See also: ‘So you’re telling me there’s a chance?’ This recession indicator puts the odds of one in the next year at 99.3%.

What analysts are saying

“Judging from the torrent of emails, IBs, and phone calls we received when yesterday’s [debt-ceiling] meeting ended without an agreement, fixed-income investors are genuinely concerned about hedging the risk of default,” said Chris Low, chief economist at FHN Financial in New York.

“While that is understandable, experience from 2011 and 2013 precedent, as well as the progress made yesterday, suggest default is highly unlikely,” Low wrote in a note. “As with any process dependent on the choices made by individuals, there is no way to be certain of the outcome. Still, from what we know about the President and the Treasury Secretary, we are confident they will choose to prioritize debt service if Treasury runs out of cash, especially if negotiations continue to be cordial and productive.”