The Fed Justifies the Tenth Rate Hike but Signals a Possible Pause in June 

The Federal Reserve just hiked interest rates for the tenth time in a row, extending its 14-month crackdown on stubborn inflation and bumping the federal funds rate to a target range of 5 to 5.25%. With signs of a slower economic growth and the banking sector turmoil, we can legitimately wonder whether this is the central bank's last rate hike for a while as the move brings borrowing costs to their highest level since July 2007. 

Besides raising interest rates, it's worth noting that the Federal Reserve has also been selling off huge chunks of its bond portfolio. Almost $59 billion over the period ranging from April 26 to May 3, i.e., 0.7% if its balance sheet shrunk in only one week. It’s also another way in which the Fed is pressing on the brakes to curb inflation.

Consequently, it would be surprising that the central bank opts for an eleventh rate hike in June, even if the U.S. created more jobs than expected in April (235,000 vs. consensus expectations for 180,000 new jobs), stoking hopes the country may be able to avoid a severe and long recession. Yet, Fed funds futures contracts are pricing in a first rate cut in Q4 2023 and now see the year-end rate near 4.40%.

Against this backdrop, the U.S. 10-year Treasury yield stabilized around 3.44% (+2 basis points) while the yield on the 2-year Treasury note fell by 9 basis points to 3.91% from 4.00%. In Europe, the yield on the German 10-year Bund slid 2 basis points over the week to 2.29% from 2.31%. Same move for the yield on the French 10-year OAT which closed 2 basis points lower to 2.88% from 2.90%.

Investment grade corporate bonds closed mixed. In Europe, the IBOXX € Liquid Corporates index edged up 0.12%. In the U.S., the IBOXX Ishares $ Investment Grade Corporate Bond Index edged down 0.26%.

High-yield bonds gained 0.18% in Europe (IBOXX € Liquid High Yield Index) but fell 0.72% in the U.S. (Markit iBoxx USD Liquid High Yield Capped Index).

Emerging debt in local currencies was down 0.34% while the dollar index weakened below 101.30 and gold surged to $2,024.90/Oz (June 2023, up 1.29% week-over-week). With the implosion of the U.S. regional banks, the yellow metal acts as a safe-haven asset.