Treasury yields rose Wednesday to kick off June as investors awaited data on manufacturing activity and job openings and the Fed begins to allow bonds to mature off its balance sheet.
What yields are doing
The yield on the 10-year Treasury note
rose to 2.855%, up from 2.842% at 3 p.m. Eastern on Tuesday. Yields and debt prices move opposite each other.
The 2-year Treasury note yield
was 2.573%, up from 2.54% Tuesday afternoon.
The 30-year Treasury bond
yielded 3.055% versus 3.056% late Tuesday.
What’s driving the market
Yields on 2- and 10-year Treasury notes pulled back in May as a brutal bond-market selloff relented, breaking a string of five consecutive monthly yield increases for the 10-year note and nine straight monthly rises for the 2-year.
Investors remain wary of inflation that continues to run at a hot pace though off its recent peak, while also worrying about the ability of the Federal Reserve to get price pressures under control without sinking the economy.
Atlanta Fed President Raphael Bostic told MarketWatch on Tuesday he had recently suggested a possible September “pause” in rate increases because the market’s response to the Fed’s shift to raising rates “was far stronger than what we’ve historically seen.”
This raises the possibility that the broader economy will respond quickly to the Fed’s rate hikes, as well, Bostic said. He dismissed the suggestion, however, that any such pause could be construed in any way as a “Fed put,” or belief that the central bank would come to the rescue of markets.
The Fed raised its key interest rate by 50 basis points, or half a percentage point, in May. Typically the Fed moves in quarter-point increments. Fed Chair Jerome Powell has said that half-point moves are on the table at the central bank’s next two policy meetings.
Fed Gov. Christopher Waller, in a speech earlier this week, continued to push for an extended series of aggressive rate increases, saying that he supports lifting interest rates by half percentage point increments for several meetings until he sees signs that inflation is coming down.
Meanwhile, the Fed will begin allowing bonds that mature to roll off its nearly $9 trillion balance sheet without replacing them beginning Wednesday. That begins the unwind of its balance sheet, a process known as quantitative tightening.
Starting in June, the Fed will begin reducing its holdings of Treasury securities, agency debt, and agency mortgage-backed securities by a combined $47.5 billion per month for the first three months. After this, the total amount to be reduced goes up to $95 billion a month, with policy makers prepared to adjust their approach.
S&P Global’s final May purchasing managers index reading for the U.S. manufacturing sector is due at 9:45 a.m., while the Institute for Supply Management’s May manufacturing index is set for 10 a.m.
Data on April job openings and leavings is also due at 10 a.m., along with a look at April construction spending. The Fed’s Beige Book report on economic conditions is set for release at 2 p.m.
St. Louis Fed President James Bullard is due to speak at 1 p.m.
The May jobs report on Friday is expected to be the key economic data release of the week.
What analysts say
“Treasury yields are off the lows and momentum has shifted in favor of further weakness in the run-up to Friday’s employment report,” said Ian Lyngen and Benjamin Jeffery, rates strategists at BMO Capital Markets, in a note.
“While the weekly charts remain constructive in the medium-term, the ability of risk assets to retain a portion of last week’s bounce has instilled a degree of solace in the investment outlook and implies the Fed still has room to follow-through on its stated path of normalization before risking a surge tighter in financial conditions. At least for now,” they wrote.