Ten-year Treasury yields made their biggest intraday gain
since March on Thursday while one-month yields jumped nearly 50
basis points higher as investors weighed a coming showdown over
the U.S. debt ceiling with economic data suggesting inflation
could remain sticky.
The yield on one-month Treasury bills rose to 4.24%, its highest since April 14, one day after the U.S. House of Representatives narrowly passed a bill that would raise the debt limit in exchange for sweeping spending cuts. The bill is not expected to pass the Senate. The Treasury Department would no longer be able to pay all of its bills if an agreement is not reached by early summer.
Longer duration yields marched higher following data from the Commerce Department showing that gross domestic product rose at an 1.1% annualized rate in the first quarter, below the 2% rate expected by economists polled by Reuters.
Still, consumer spending grew at a faster pace than expected, while jobless claims fell to 230,000 from 246,000 the prior week, suggesting that household spending remains strong despite the Federal Reserve's most aggressive rate hiking cycle since the early 1980s. The central bank is widely expected to raise benchmark rates by 25 basis points at its policy meeting next week.
"The market was expecting inflation to moderate more than it has and this gives the Fed more ammunition to raise rates next week," said Lawrence Gillum, chief fixed income strategist at LPL Financial. "We’re not ready to call it a stagflationary environment yet but if inflation stays stubbornly high it will get there." Stagflation - a combination of slow growth and persistent high inflation - weighed heavily on nearly all financial assets in the late 1970s.
Following Thursday's data reports, investors are now pricing in a nearly 25% chance that the central bank raises rates by another 25 basis points at its June meeting, up from a 14% chance seen the day before.
"The Fed clearly needs to keep raising rates because of
inflation, and they are going to be raising rates right into a
slowdown," said Chris Zaccarelli, chief investment officer at
Independent Advisor Alliance.
The yield on 10-year Treasury notes was up
9.8 basis points to 3.528%, while the yield on the 30-year
Treasury bond was up 7.2 basis points to 3.761%.
The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was up 17.5 basis points at 4.099%.
Bond yields move in the opposite direction of prices.
April 27 Thursday 2:55PM New York / 1855 GMT
Price Current Net
Yield % Change
(bps)
Three-month bills 5.045 5.1804 0.037
Six-month bills 4.845 5.0487 0.053
Two-year note 99-147/256 4.0992 0.175
Three-year note 99-200/256 3.8283 0.160
Five-year note 99-132/256 3.6068 0.142
Seven-year note 100-76/256 3.5759 0.120
10-year note 99-192/256 3.53 0.100
20-year bond 99-224/256 3.8838 0.078
30-year bond 97-148/256 3.7606 0.072
DOLLAR SWAP SPREADS
Last (bps) Net
Change
(bps)
U.S. 2-year dollar swap 28.50 -2.75
spread
U.S. 3-year dollar swap 16.25 -2.00
spread
U.S. 5-year dollar swap 7.50 0.25
spread
U.S. 10-year dollar swap 0.00 0.00
spread
U.S. 30-year dollar swap -42.50 -0.25
spread
(Reporting by David Randall, Editing by Nick Zieminski and Susan Fenton)
Messaging: david.randall.thomsonreuters.com@reuters.net))