Bond yields rose on Monday as demand for government bonds softened amid hopes for a debt-ceiling deal.
What’s happening
-
The yield on the 2-year Treasury
TMUBMUSD02Y,
4.008%
added 1.3 basis points to 4.008%. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury
TMUBMUSD10Y,
3.500%
rose 1.2 basis points to 3.480%. -
The yield on the 30-year Treasury
TMUBMUSD30Y,
3.831%
climbed less than 1 basis point to 3.799%.
What’s driving markets
Hopes for a U.S. debt-ceiling resolution were boosting risk appetite at the start of the week — with stocks and commodities firmer — and damping demand for the perceived safety of government bonds, nudging yields slightly higher.
News on Friday that U.S. consumers’ long-run inflation expectations have risen to 3.2%, their highest since 2011, continued to pressure yields to the upside, too, on expectations this may make it more difficult for the Federal Reserve to ease its monetary tightening policy anytime soon.
Markets are pricing in a 79% 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 back down to 4.5% by December, according to 30-day Fed Funds futures.
U.S. economic updates set for release on Monday include the Empire State manufacturing survey, due at 8:30 a.m. Eastern.
There will also be some Fedspeak, with Chicago Fed President Austan Goolsbee on TV at 8:30 a.m. and Minneapolis Fed President Neel Kashkari making comments at 9:15 a.m.
What are analysts saying
“Markets have concluded that the Fed will either stay on pause or cut rates in June – but we continue to think the more likely outcome is another 25bp hike, followed by a further 25bp rate increase in July,” said Andrew Hollenhorst, economist at Citi.
“Fed officials will…be concerned by the unexpected rise in preliminary May University of Michigan 5-10y expectations to 3.2%. That’s the highest reading since 2012. To add to the concern that inflation expectations are moving structurally higher, 1y expectations that had declined to 3.6% spiked to 4.6% in April and only fell back to 4.5% in May.”
“Stepping back from the exact readings (which are known for being volatile), Fed officials will perceive an increased risk that the extended inflation overshoot is beginning to seep more structurally into perceptions of future price increases,” Hollenhorst added.
This story originally appeared on Marketwatch
