Bond yields rose on Tuesday as traders priced in recent hawkish commentary from Federal Reserve official.
What’s happening
-
The yield on the 2-year Treasury
TMUBMUSD02Y,
4.388%
climbed 3.1 basis points to 4.372%. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury
TMUBMUSD10Y,
3.748%
rose 1.5 basis points to 3.729%. -
The yield on the 30-year Treasury
TMUBMUSD30Y,
3.986%
gained less than 1 basis point to 3.974%.
What’s driving markets
Traders remained wary of the looming debt-ceiling deadline while also parsing fresh comments from Federal Reserve officials.
Treasury Secretary Janet Yellen has again warned congress that the U.S. may not be able to pay its bills as soon as June 1st, if an agreement to raise the debt ceiling is not reached.
President Joe Biden and House Speaker Kevin McCarthy failed to reach a deal on Monday but both said their meeting was “productive”.
Still, concerns that the U.S. may soon technically default is causing tension in bond markets. The yield on U.S. six-month T-bills
TMUBMUSD06M,
rose to 5.381%, up more than 30 basis points over the past month and claiming their highest level since 2000, according to Saxo Bank.
Meanwhile, the yield on two-year Treasuries rose for the ninth consecutive session after St. Louis Fed President James Bullard on Monday said he would like to see two more quarter-percentage-point interest-rate hikes this year.
Markets are pricing in an 84.7% probability that the Fed will leave interest rates unchanged at a range of 5.0% to 5.25% after its meeting on June 14, according to the CME FedWatch tool.
The central bank is expected to take its Fed funds rate target to 4.8% by December, according to 30-day Fed Funds futures.
U.S. economic updates set for release on Tuesday include S&P flash U.S. services and manufacturing purchasing manager indices for May, due at 9:45 a.m. Eastern. Before that at 9 a.m. Dallas Fed President Lorie Logan is expected to deliver some comments.
What are analysts saying
“With Fed speakers sounding more hawkish, investors continued [on Monday] to dial up their expectations for the Fed funds rate over the months ahead,” said Jim Reid, strategist at Deutsche Bank.
“For instance, the chances of a June hike moved back up to 22.5%. And the rate priced in for the December meeting was up +6.1bps to a post-SVB high of 4.696% (just above the midpoint of its intra-day range of 3.40% to 5.56% this year), which speaks to the increasing scepticism that the Fed will be able to cut rates this calendar year. In turn, that meant yields on 10yr Treasuries rose for a 7th consecutive session, rising +4.2bps to 3.715%. That’s the longest string of increases in over a year, having been at just 3.38% before this current run began a week and a half ago,” Reid wrote in a morning note.
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