Bond Report: Two-year Treasury yield jumps back above 4% after Fed’s Waller suggests more rate hikes

What’s happening?

• The yield on the 2-year Treasury 
  TMUBMUSD02Y,
  4.105%
  jumped to 4.097% from 3.975% on Thursday. It reached an intraday high of 4.13%, the highest since April 3, according to FactSet data.

• The yield on the 10-year Treasury 
  TMUBMUSD10Y,
  3.497%
  was 3.493%, up from 3.45% Thursday afternoon.

• The yield on the 30-year Treasury
  TMUBMUSD30Y,
  3.720%
    was up at 3.713% versus 3.686% late Thursday.

• The 1-month T-bill rate
  TMUBMUSD01M,
  3.994%
  was up 15 basis points at 3.951% after almost touching 4%, according to FactSet.

What’s driving markets?

In a speech on Friday, Federal Reserve Gov. Christopher Waller said policy makers need to continue raising interest rates because inflation is “still much too high.”

After his remarks, fed funds futures traders priced in an almost 80% chance of a 25-basis-point interest-rate hike in May, up from 67% a day ago, which would take the Fed’s main policy rate target to between 5% and 5.25%, according to the CME’s FedWatch Tool.

Traders also saw a 17.8% likelihood of another quarter-point hike in June, while paring the extent of rate cuts they foresee later this year. The readjustment in expectations came despite weakness in Friday’s data: Retail sales tumbled 1% in March, declining for the fourth time in the past five months. Industrial output, though, was up 0.4% in March.

However, Chicago Fed President Austan Goolsbee said on Friday that the U.S. economy could slip into recession given the fast pace of interest rate rates over the past year.

Inflation data released earlier this week showed a rise in the core measures of the consumer-price index which strips out food and energy costs for March, though wholesale prices saw their biggest drop in almost three years. And there was a small increase in the number of Americans who applied for unemployment benefits last week.

In U.S. economic data released Friday, sales at retailers dropped 1% in March and declined for the fourth time in the past five months, reflecting a slowdown in the U.S. economy and a shift in consumer-spending habits.

On Friday, investors were also watching the start of the first quarter corporate earnings reporting season from the banking sector, following a crisis last month that brought about the demise of Silicon Valley Bank and two other lenders. JPMorgan Chase & Co.
JPM,
+6.95%,
 Wells Fargo & Co.
WFC,
-0.54%,
and Citigroup Inc.
C,
+2.92%
all reported earnings results.

What analysts are saying

“Investors have to once again re-evaluate how far the Fed is willing to go,” said Tom di Galoma, managing director and co-head of rates trading for financial services firm BTIG. “I believe the Fed will do 25 basis points more in May, just based on Waller’s comments.”