US Treasury Yield Rebound After Data Reinforces Powell’s Hawkishness

Treasury yields surged to their highest levels in almost four months as recent U.S. data reinforced the resilient state of the economy and job market. Jerome Powell reiterated the limited scope for easing monetary policies, further bolstering the upward trajectory. Unemployment insurance claims for the week ending June 24th totalled 239,000, below market estimates of 265,000. Additionally, the final report on first-quarter Gross Domestic Product growth revealed a 2.0% expansion, exceeding the previous month's 1.3% reading.

The yield on the 10-year T-Note spiked by 10 basis points to 3.84%, reaching its highest level since early March. Correspondingly, the two-year U.S. Treasury yield surged to 4.90%, up 15 basis points. Consequently, the widely observed spread in the U.S. Treasury yield curve, which measures the difference between the yields on two- and 10-year Treasury notes, gravitated towards the maximum inversion experienced in March during the regional banking crisis. It currently stands at -106 basis points.

European bond yields also experienced upward momentum as multiple central bankers expressed hawkish views on inflation, cautioning that interest rates may need to remain elevated for an extended period. Market indicators currently suggest a 90% likelihood of the European Central Bank (ECB) raising rates to 3.75% in July, with expectations of reaching a peak around 4.0%. The yield on the German 10-year Bund increased by 4 basis points, climbing from 2.35% to 2.39%. The 10-2 year spread now stands at -81 basis points.

Against this backdrop, investment grade corporate bond indexes were mixed. The IBOXX € Liquid Corporates index slid 0.32%, while the IBOXX iShares $ Investment Grade Corporate Bond Index edged up 0.06%.

Unlike the previous week, high-yield bonds edged down 0.08% in Europe (IBOXX € Liquid High Yield Index), while their U.S. counterparts were up 0.85% (Markit iBoxx USD Liquid High Yield Capped Index).

Lastly, emerging debt denominated in local currencies was treading water (0.01%), while the dollar index remained virtually unchanged week-over-week.

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