U.S. bond yields were higher on Friday in quiet trading as investors tried to keep their powder dry ahead of next week’s May inflation data and a Federal Reserve interest-rate decision.
What’s happening
-
The yield on the 2-year Treasury
TMUBMUSD02Y,
4.602%
advanced 7 basis points to 4.594% versus 4.517% at 3 p.m. Eastern Thursday. -
The yield on the 10-year Treasury
TMUBMUSD10Y,
3.746%
gained 4 basis points to 3.747% compared with 3.714% Thursday. -
The yield on the 30-year Treasury
TMUBMUSD30Y,
3.887%
added 2 basis points to 3.900% from 3.882% late Thursday.
What’s driving markets
With no notable U.S. economic releases due Friday, bond market’s attention is focused on next Tuesday’s May inflation data and Wednesday’s Federal Reserve monetary policy decision.
Markets are pricing in a 72% probability that the Fed will leave interest rates unchanged at a range of 5.0% to 5.25% after its meeting on June 14, according to the CME FedWatch tool.
The chances of a 25 basis point hike to 5.25% to 5.50% in July is priced at 52%.
Investors were more relaxed about the prospects for Fed policy and its impact on bond markets given the mixed economic data of late.
The ICE Bank of America MOVE index, which measures expected volatility in Treasuries, is hovering around 115 on Friday morning, near its lowest level since February and way down from the 200 mark hit in March in the wake of regional bank failures.
What are analysts saying
Not everyone thinks the Fed will refrain from raising interest rates next week.
“Next week’s decision is likely to come down to the wire, but we maintain our long-held view that the Fed will tighten rates by a final 25 basis points in June to a range of 5.25%-5.50%. If the Fed decides to ‘skip’ the June meeting, we expect the decision to be accompanied by communication that leans hawkish, signaling a likely hike for July,” said strategists at TD Securities led by Oscar Munoz, chief U.S. macro strategist.
“The rates market reaction will hinge on whether the Fed hikes rates or promises a hike in the future as we head into the most uncertain FOMC meeting of the current cycle. Treasuries are likely to bear flatten sharply in the event of a rate hike as the market pencils in the potential for more hikes in July. However, if the Fed passes on a hike, we expect the curve to bull steepen sharply even if the Fed continues to insist that they are not finished tightening yet,” Munoz and his team said.
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