The yield on U.S. Treasury bonds rose markedly, helped by statements from Fed policymakers. Market participants are also preparing for the publication of economic data that could change the outlook for the Fed's monetary policy.
The yield on 5-year Treasury bonds rose by 4.6 basis points, reaching 4.309%, while the yield on 30-year bonds was 4.404% (+3.2 basis points). Meanwhile, the yield on 2-year Treasury bonds, reflecting expectations of short-term interest rates, rose by 4.4 basis points to 4.735%, while the yield on 10-year bonds increased to 4.277% (+3.9 basis points). The curve between the 10-year Treasury yield and the 2-year yield remains inverted, sending a warning that the economy may be falling or has already fallen into recession. Now the gap between 10 and 2 year U.S. debt is 46 basis points.
Fed Governor Michelle Bowman said yesterday that the Fed is not ready to cut rates. She added that starting the monetary policy easing process would be "appropriate" only when the data shows that inflation is sustainably easing towards the Fed's 2% target. Bowman also did not rule out further interest rate increases. Meanwhile, Fed Governor Lisa Cook warned that she expects slight changes in the rate of inflation this year, but next year inflation is likely to “slow down more sharply.” According to the CME FedWatch Tool, markets see a 10.3% probability of a 25 basis point rate cut at the Fed meeting in July, a 64.1% probability of a rate cut in September, and a 76.5% probability of monetary policy easing in November.
As for the data, the final report on US GDP for the 1st quarter will be presented on Thursday, and the personal consumption expenditures (PCE) price index will be released on Friday. The PCE is the Fed’s favored inflation gauge and could therefore inform policymakers’ thinking on expectations for the economy and the timeline for potential interest rate cuts.
Today, the focus of investors' attention will be on new home sales data for May. Housing demand has stalled this year as higher rates reduce housing affordability. Sales activity was certainly sensitive to changes in mortgage rates. New home sales fell by almost 5% in April as the average 30-year fixed mortgage rate approached a 5-month high. The decrease in mortgage rates in May probably contributed to some recovery in sales. According to forecasts, new home sales increased to 650 thousand in May from 634 thousand in April.