U.S. yields climb to one-week peaks, but post monthly declines in May

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NEW YORK — U.S. Treasury yields rose

sharply on Tuesday, with most maturities hitting one-week highs,

as investors re-focused on inflation risks after euro zone

inflation climbed to a record high this month and after upbeat

U.S. economic data.

Tuesday’s reports on housing and factory activity in the

Midwest showed generally strong results, putting upward pressure

on yields.

That said, U.S. yields posted monthly declines in May,

driven by softening economic reports during the month and

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indications U.S. inflation may have peaked.

The U.S. 2-year yield, which tends to be

sensitive to rate expectations, dropped 18.4 basis points in

May, the largest monthly decline since March 2020.

The benchmark 10-year yield fell 9.3 bps, the first monthly

decline since November 2021.

Tuesday’s rise in yields, however, was led by the belly of

the curve, with U.S. five-year and seven-year notes gaining more

than 10 basis points at one point. U.S. two- to 30-year yields,

except those on 20-year bonds, all climbed to one-week peaks.

The yield curve was also steeper, with the spread between

U.S. two-year and 10-year yields wider at 29 bps.

“We look to nonfarm payrolls later this week and average

hourly earnings as the next data points to show that the labor

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market is still very hot and the wage pressure still high,” said

Zachary Griffiths, rates strategist, at Wells Fargo Securities

in Charlotte, North Carolina.

“To us, the market is not pricing in a high-enough terminal

rate,” he added, referring to where interest rates will peak in

this cycle. “So that’s going to continue to push yields higher

and the curve flatter.”

Eurodollar futures show a terminal rate of about 3.2% in the

latest Federal Reserve tightening plan, hitting in June next

year.

The rise in yields kicked off in European trading after data

showed euro zone inflation accelerated to a record 8.1% in May

from 7.4% in April, beating expectations for 7.7% as price

growth continued to broaden.

The push in Treasury yields higher was also driven in part

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by hawkish comments from Fed Governor Christopher Waller on

Monday.

Waller said he is advocating to keep 50-basis-point rate

hikes on the table until substantial reductions are seen in

inflation.

In afternoon trading, U.S. benchmark 10-year yields gained

nearly 10 bps to 2.8477%.

Treasury yields also ticked higher after strong U.S. housing

data.

A report showed that the S&P CoreLogic Case-Shiller 20

metropolitan area home price index surged a record 21.2% on a

year-on-year basis in March.

Strong house price inflation was also reinforced by another

report from the Federal Housing Finance Agency showing home

prices increased 19% in the 12 months through March.

U.S. consumer confidence, however, slipped in May, but April

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was revised higher. Overall the May reading remained above the

pandemic lows.

U.S. 30-year yields rose 8 bps to 3.0558%.

On the front end of the curve, U.S. two-year yields rose 4.8

bps to 2.5464%.

Data also showed that manufacturing activity in the U.S.

Midwest rose to a higher-than-expected reading of 60.3 in May

from 56.4 in April, based on the Chicago Purchasing Management

Index. That also helped push yields higher. The May index was

stronger than the 55.0 consensus.

“Other regional surveys for May are, on net, suggesting

modest slowing in the manufacturing ISM,” said Rubeela Farooqi,

chief U.S. economist at High Frequency Economics, in a report

after the data’s release.

“Overall, even as the survey data are signaling some

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moderation, manufacturing output continues to expand in spite of

supply network dislocations and shortages.”

May 31 Tuesday 3:10PM New York / 1910 GMT

Price Current Net

Yield % Change

(bps)

Three-month bills 1.05 1.0672 -0.021

Six-month bills 1.535 1.5682 0.056

Two-year note 99-233/256 2.5464 0.048

Three-year note 100-24/256 2.7165 0.059

Five-year note 99-32/256 2.8139 0.078

Seven-year note 99-64/256 2.8691 0.094

10-year note 100-60/256 2.8477 0.099

20-year bond 99-200/256 3.2649 0.096

30-year bond 96-120/256 3.0558 0.080

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap 34.25 3.00

spread

U.S. 3-year dollar swap 17.25 1.25

spread

U.S. 5-year dollar swap 4.75 0.25

spread

U.S. 10-year dollar swap 8.00 1.00

spread

U.S. 30-year dollar swap -21.75 1.00

spread

(Reporting by Gertrude Chavez-Dreyfuss in New York; Additional

reporting by Yoruk Bahceli in London; Editing by Kirsten

Donovan, Marguerita Choy and Andrea Ricci)