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Treasury yields fell on Tuesday amid easing concerns over a possible technical U.S. default, even though signs of sticky inflation still left traders pricing in a likely interest-rate hike by the Federal Reserve next month.
What’s happening
-
The yield on the 2-year Treasury
TMUBMUSD02Y,
4.481%
slipped by 3.3 basis points to 4.531%. -
The yield on the 10-year Treasury
TMUBMUSD10Y,
3.701%
retreated 7.9 basis points to 3.727%. -
The yield on the 30-year Treasury
TMUBMUSD30Y,
3.902%
fell 4.8 basis points to 3.913%.
What’s driving markets
Yields on short-term Treasury bills were lower Tuesday as news over the weekend of a debt-ceiling deal in Congress eased fears that the U.S. government may technically default.
President Joe Biden and House Speaker Kevin McCarthy on Sunday reached final agreement on a deal to raise the nation’s debt ceiling and worked to ensure enough support in Congress to pass the measure before a June 5 deadline to avert a technical default.
The yield on the 1-month T-bill maturing in the first eight days of June, which was considered particularly at risk of default, was trading around 5.2% Tuesday, after topping 7% last week as investors steered clear of more at-risk bills.
Andrew Hollenhorst, chief U.S. economist at Citi, said the drop in the short-term yields was a sign that markets expect the debt ceiling deal to pass both chambers of Congress and be signed into law.
“We expect a House vote after markets close Wednesday night and the Senate to pass the bill over the weekend. Some progressive Democrats and conservative Republicans have signaled they will vote against the bill, but leadership will have expected to lose those votes,” Hollenhorst wrote in a Tuesday note.
The moves are helping suppress yields across the curve after they rose on Friday in the wake of the PCE inflation report for April which suggested price pressures remained stubbornly high.
Investors are consequently now betting that the Federal Reserve will soon tighten monetary policy further.
Markets are pricing in a 60.8% probability that the Fed will raise its policy interest rates by 25 basis points to a range of 5.25% to 5.50% after its meeting on June 14, according to the CME FedWatch tool. A week ago the chances of such a hike were priced at 28%.
