Treasury Yields Rose As Investors Cool Their Heels Ahead Of Data

On Wednesday, U.S. Treasury yields experienced an increase as investors remained cautious ahead of the release of May inflation data and the Federal Reserve's upcoming policy meeting. Here are the key details:

• The yield on the 2-year Treasury rose by 4 basis points to 4.580% from its previous level of 4.523%.
• The yield on the 10-year Treasury advanced by 2 basis points to 3.719% compared to 3.699% previously.
• The yield on the 30-year Treasury saw a modest increase of 1 basis point, reaching 3.847% from 3.880%.

‍

In terms of market drivers, recent economic data revealed that the U.S. monthly international trade deficit expanded by 23% in April, reaching a six-month high of $74.6 billion. This rise can be attributed to a decrease in exports and an increase in imports. Additionally, investors are eagerly anticipating the release of U.S. consumer credit data for April, scheduled for 3 p.m. Eastern. Furthermore, the upcoming release of May consumer-price data, a day before the Federal Reserve's policy decision, is also generating significant interest.

‍

Market expectations currently indicate a 77.1% likelihood that the Federal Reserve will maintain its policy interest rate within the range of 5.0% to 5.25% after the June 14 meeting, according to the CME FedWatch tool. Meanwhile, the Bank of Canada unexpectedly raised its overnight lending rate by 25 basis points to 4.75%, marking its highest level since 2001. This decision deviated from expectations of keeping rates unchanged at 4.5%. The Bank of Canada, which paused its interest-rate hiking cycle in March, now recognizes the need for higher borrowing costs to combat inflation in a more resilient economy than anticipated.

‍

Furthermore, the Organization for Economic Cooperation and Development (OECD) cautioned that the global economy faces a precarious recovery due to persistent inflation and higher interest rates. Data from China revealed a 7.5% year-on-year decline in exports in May, significantly lower than the 8.5% growth seen in April. These weak updates have heightened expectations of potential stimulus measures by Chinese officials to boost the economy.

‍

Analysts emphasize that although U.S. markets assign a relatively low probability of a rate hike in June, with higher expectations for a hike in July, examples from other countries demonstrate the risks of prematurely pausing monetary policy and the potential for resurgent inflation to trigger surprise rate hikes. For instance, both Australia and Canada observed increased house prices rather than slower growth or easing inflation when they maintained policy rates. Consequently, economists, led by Andrew Hollenhorst, Chief U.S. Economist at Citigroup, caution that a pause by the Federal Reserve risks a similar experience in the United States. They assert that once it becomes evident that policy rates are insufficiently restrictaive, central banks, including the Fed, may respond by raising rates sooner than anticipated. Citigroup's economists maintain their base case of a 25 basis-point rate hike by the Fed in the upcoming week.

‍

‍