Bonds rallied earlier this week after consumer and producer price reports showed that inflation is continuing to ease, even though price pressures remain well above the Fed’s 2% target. Headline consumer prices rose at an annual rate of 4.9% in April. “We’re on the way towards more stable inflation, something that’s closer to target, and the market rallied because I think probably some of the last few bets that the Fed might have to hike in June are probably coming off,” said Thomas Simons, a money market economist at Jefferies in New York. Friday's data, however, showed consumers' five-year inflation outlook rising to 3.2%, from 3.0% last month.
"Today's data increases the chances of a June hike, but probably isn't enough to tip the scales," Simons said. The survey's reading of one-year inflation expectations dipped to 4.5% after jumping to 4.6% in April. Consumer sentiment fell on worries that political haggling over raising the federal government's borrowing cap could trigger a recession. The yield on benchmark 10-year notes rose 6 basis points on the day to 3.461% and two-year yields rose 10 basis points to 4.002%. The inversion in the yield curve between two-year and 10-year notes deepened to minus 54 basis points. Fed funds futures traders are pricing in 88% odds that the U.S. central bank will leave rates unchanged in June, and they expect around 68 basis points of cuts by year-end. Concerns about Congress not raising the debt ceiling on time have created large distortions in the short-end of the yield curve as investors avoid bills that come due when the Treasury is at risk of running out of funds, and pour into alternative issues. A debt limit meeting between U.S. President Joe Biden and top lawmakers that had been scheduled for Friday has been postponed, and the leaders agreed to meet early next week. Aides from both sides have started to discuss ways to limit federal spending, as part of an agreement to raise the $31.4 trillion debt ceiling. One-month bill yields were at 5.665% on Friday, just below a record 5.811% reached on Wednesday. Two-month bill yields were 4.835%, after volatile trading on Thursday saw them trade as low as 4.526% and as high as 5.145%.
May 12 Friday 3:00PM New York / 1900 GMT
Price Current Net
Yield % Change
(bps)
Three-month bills 5.0675 5.2016 0.018
Six-month bills 4.925 5.1321 0.016
Two-year note 99-195/256 4.0019 0.096
Three-year note 99-226/256 3.6666 0.100
Five-year note 100-58/256 3.4496 0.093
Seven-year note 100-72/256 3.454 0.083
10-year note 99-72/256 3.4606 0.064
20-year bond 100-40/256 3.8633 0.043
30-year bond 97-84/256 3.7746 0.031
DOLLAR SWAP SPREADS
Last (bps) Net
Change
(bps)
U.S. 2-year dollar swap 20.00 -0.75
spread
U.S. 3-year dollar swap 14.75 -1.25
spread
U.S. 5-year dollar swap 7.75 -1.00
spread
U.S. 10-year dollar swap -0.50 -1.00
spread
U.S. 30-year dollar swap -44.00 -0.50
spread
(Reporting by Karen Brettell; Editing by Christina Fincher, Jonathan Oatis and Cynthia Osterman)
