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Treasury yields higher as market prices in 25 basis point hike by Fed in May

Bond yields nudged higher on Monday as calmer conditions across markets softened demand for the perceived safety of government bonds.

What’s happening
  • The yield on the 2-year Treasury

    climbed 5.5 basis points to 4.165%. Yields move in the opposite direction to prices.

  • The yield on the 10-year Treasury

    rose 3.7 basis points to 3.566%.

  • The yield on the 30-year Treasury

    added 4 basis points to 3.779%.

What’s driving markets

Treasury yields went higher after data shows that the New York Fed’s Empire State business conditions index, a gauge of manufacturing activity in the state, jumped 35.4 points in April to 10.8. 

Economists had expected a reading of negative 15, according to a survey by The Wall Street Journal.

Any reading above zero indicates improving conditions. This is the first reading in positive territory in five months.

See: New York factory index shows increase in activity for first time in five months

Meanwhile, expectations that the Federal Reserve will raise interest rates in a few weeks time have hardened after a report on Friday showed consumers see inflation over the coming year at a higher level than previously thought.

Markets are pricing in an 88.2% probability that the Fed will raise interest rates by another 25 basis points to a range of 5.0% to 5.25% after its meeting on May 3, according to the CME FedWatch tool.

The central bank is expected to take its fed-funds rate target back down to 4.6% by December, according to 30-day Fed Funds futures.

As investors have become less uncertain about the trajectory of Fed tightening, so traders have become less concerned about the chances of sharp vacillations in bonds.

The BoAML MOVE index, which measures expected volatility in Treasurys, is trading around 120, having plunged from near 200 in mid March.

For other U.S. economic updates Monday, the April home builder confidence index is due at 10 a.m. ET and Richmond Fed President Tom Barkin is due to make comments at 12:45 p.m.

What are analysts saying

“Despite the softer-than-expected inflation data released earlier last week, U.S. inflation expectations shocked investors at last Friday’s release; the 1-year expectation jumped from 3.6% to 4.6% due to the surprise surge in energy prices. The expectation was a further easing to 3.5%,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.

“Combined to waning bank stress, the U.S. 2-year yield — which is a good proxy of what investors think the Fed will do — rose last week, although we are still far below the 5% level before the Silicon Valley Bank collapsed,” she added.

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