Treasury Yields Stabilize Amid Contradictory Data on the Inflation Front

Recent macro data showing a slowing economy and easing inflation have substantiated the prospect of the Fed rate hike pause after the tenth interest rate increase in just a little over a year. Over the last 12 months, the all-items CPI increased by 4.9% before the seasonal adjustment. This is the smallest increase in two years, as stressed by the U.S. Bureau of Labor Statistics Wednesday in a monthly inflation report. Moreover, weekly jobless claims rose more than expected.

However, the decline in the University of Michigan consumer sentiment (down 9.09% to 57.7 from 63.5) has provided a contrasting view, painting a stagflationary picture for the U.S. economy. On the one hand, year-ahead expectations for the economy plummeted 23% month-over-month. On the other hand, long-run inflation expectations rose to their highest reading since 2011, lifting from 3.0% in April to 3.2% in May. Could this data justify another rate hike at the June Fed meeting?

With signs of slower economic growth and the banking sector turmoil, it would be surprising that the central bank is willing to take that risk after the fastest rate hike in history. In any event, this is the assumption made by traders and investors as evidenced by the Fed fund futures. A first-rate cut is even expected in Q4 2023 bringing the year-end rate to 4.50%.

With this complex and contradictory picture of the economy, long-term government bond yields were treading water. The U.S. 10-year Treasury yield stabilized around 3.47% (+3 basis points) while the yield on the 30-year Treasury note rose to 3.79% from 3.76%. But the yield on the 2-year Treasury note rose 9 basis points to 4.00% from 3.91%.

In Europe, the yield on the German 10-year Bund remained virtually unchanged at 2.28% (down one basis point).

Investment grade corporate bonds closed mixed. In Europe, the IBOXX € Liquid Corporates index edged up 0.14%. In the U.S., the IBOXX iShares $ Investment Grade Corporate Bond Index was down 0.45%.

High-yield bonds gained 0.22% in Europe (IBOXX € Liquid High Yield Index) but lost 0.26% in the U.S. (Markit iBoxx USD Liquid High Yield Capped Index).

Emerging debt in local currencies dropped 0.66% while the dollar index gained momentum with the biggest weekly rise since February (+1.31% above 102.7).