U.S. government bond yields, which move inversely to prices, rose late last week after data showing consumers' long-term inflation expectations increased to their highest reading since 2011 in May. That followed an earlier bond price rally after consumer and producer price reports showed inflation was continuing to ease. "While realized inflation might be grinding back toward the Fed's objective, forward expectations are trending decidedly in the wrong direction for the FOMC (Federal Open Market Committee)," BMO Capital Markets strategists Ian Lyngen and Benjamin Jeffery said in a note. "This divergence is surely concerning for policymakers as it reinforces the need for Fed funds to remain restrictive for an extended period," they said. Fed funds futures traders on Monday were anticipating about 70 basis points of rate cuts by the end of this year, but some Federal Reserve officials signaled that the Fed's battle against inflation was far from over. "We look at the Fed funds futures market and are confounded by the expectations that the Fed will cut later this year," said Michael Reynolds, vice president of investment strategy at Glenmede. "The Fed is telling us pretty explicitly that it has no plans to do anything like that, inflation has been staying sticky and inflation expectations have been moving higher." Benchmark 10-year yields climbed four basis points to 3.507% and 30-year bonds were up nearly seven basis points to 3.842%, also reflecting moves in government bonds in Europe, where the European Commission forecast higher growth and inflation. Two-year U.S. yields were flat on the day at 4%, having declined earlier on Monday after the New York Federal Reserve's "Empire State" index on current business conditions dropped by much more than expected in May. Meanwhile, investors remained laser-focused on talks around the U.S. government's debt ceiling, with President Joe Biden expected to meet congressional leaders to discuss the issue on Tuesday. Ahead of the planned meeting, Republican House of Representatives Speaker Kevin McCarthy said the two sides were still far apart. At nearly 5.6%, one-month Treasury bills were the highest yielding government bonds on Monday, reflecting worries that a default may occur as soon as next month if the government does not strike a deal to raise the current borrowing cap. The prospect of a possible debt limit breach added to worries about an economic slowdown, with the BlackRock Investment Institute saying risk assets had not yet fully reacted to the risk of a default.
"We stay invested but cautious against this backdrop," it said in a note.
May 15 Monday 3:00PM New York / 1900 GMT
Price Current Net
Yield % Change
(bps)
Three-month bills 5.03 5.1619 -0.054
Six-month bills 4.945 5.1527 0.021
Two-year note 99-193/256 4.0062 0.002
Three-year note 99-222/256 3.6722 0.003
Five-year note 100-34/256 3.4703 0.019
Seven-year note 100-20/256 3.4871 0.032
10-year note 98-228/256 3.5075 0.044
20-year bond 99-72/256 3.9273 0.061
30-year bond 96-36/256 3.8429 0.066
DOLLAR SWAP SPREADS
Last (bps) Net
Change
(bps)
U.S. 2-year dollar swap 19.75 -0.25
spread
U.S. 3-year dollar swap 14.50 -0.50
spread
U.S. 5-year dollar swap 7.25 -0.50
spread
U.S. 10-year dollar swap -1.00 -0.50
spread
U.S. 30-year dollar swap -44.75 -0.75
spread
(Reporting by Davide Barbuscia Editing by Bernadette Baum and Will Dunham)
