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Treasury yields finished higher on Monday, with the policy-sensitive 2-year rate rising for a third straight session, amid hopes for a U.S. debt-ceiling agreement, which softened demand for government bonds.
What happened
-
The yield on the 2-year Treasury
TMUBMUSD02Y,
4.004%
was 4.004%, marginally higher from Friday’s level of 4.002%. The yield is up 10.5 basis points over the last three trading sessions, according to 3 p.m. figures from Dow Jones Market Data. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury
TMUBMUSD10Y,
3.506%
rose 4.5 basis points to 3.506% from 3.461% as of Friday afternoon. -
The yield on the 30-year Treasury
TMUBMUSD30Y,
3.843%
climbed 6.5 basis points to 3.841% from 3.776% late Friday.
What drove markets
Hopes for a U.S. debt-ceiling resolution damped demand for the perceived safety of government bonds, nudging most yields higher.
A second round of debt-ceiling talks between the White House and congressional leaders appears set for Tuesday, President Joe Biden said over the weekend. Biden described himself as optimistic and said both sides have a desire to reach an agreement. However, House Speaker Kevin McCarthy said on Monday that he’s still “far apart” from Biden on reaching a deal.
News on Friday that U.S. consumers’ inflation expectations over the next five years have risen to 3.2%, their highest since 2011, continued to pressure yields to the upside, too, on expectations this might make it more difficult for the Federal Reserve to ease its monetary tightening policy next month.
Markets are pricing in a 75.3% probability that the Fed will leave interest rates unchanged at between 5%-5.25% on June 14, as well as a 24.7% chance of a quarter-of-a-percentage-point rate hike next month, according to the CME FedWatch tool. The central bank is mostly expected to take its fed-funds rate target back down to between 4.25%-4.5% by December, according to 30-day Fed Funds futures.
On Monday, Atlanta Federal Reserve Bank President Raphael Bostic said he would like to see the central bank pause its hiking cycle to gauge the health of the economy after a series of rate increases since March 2022.
In data released earlier in the day, the New York Fed’s Empire State manufacturing survey plummeted to negative 31.8 in May, further below zero than economists had expected.
What analysts are saying
With debt-ceiling talks scheduled for Tuesday, “there is renewed optimism as to the prospects for a resolution — albeit one of a nature yet to be revealed or digested by the U.S. rates market,” said BMO Capital Markets strategists Ian Lyngen and Ben Jeffery, in a note.
“One aspect of the near-term outlook that appears consistent is that a technical default by the U.S. Treasury Department is generally viewed as a bond bullish event with a flight-to-quality bid seen overshadowing any implied credit concerns,” they wrote. “Embedded within this observation is the notion that a debt-ceiling deal should be bond bearish and result in marginally higher yields.”
