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)
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