Bond Report: Two-year Treasury yields rise for 9th day in a row

Treasury yields rose again on Tuesday as traders priced in recent hawkish commentary from Federal Reserve officials and awaited a resolution on the debt-ceiling debate in Congress. What’s happening
The yield on the 2-year Treasury
TMUBMUSD02Y,
4.401%
climbed 4.9 basis points to 4.367% from 4.318% on Monday.

The yield on the 10-year Treasury
TMUBMUSD10Y,
3.741%
rose 1.8 basis points to 3.735% from 3.717% as of Monday afternoon.

The yield on the 30-year Treasury
TMUBMUSD30Y,
3.988%
rose 1.6 basis points to 3.985% from 3.969% late Monday.

What’s driving markets Traders remained wary of the looming U.S. debt-ceiling deadline, while also parsing fresh comments from Federal Reserve officials.President Joe Biden and House Speaker Kevin McCarthy failed to reach a deal on Monday, but both said their meeting was “productive.” Meanwhile, in a letter to McCarthy on Monday, Treasury Secretary Janet Yellen again warned that the U.S. may not be able to pay its bills as soon as June 1 if an agreement to raise the debt ceiling is not reached.

Concerns that the U.S. may soon technically default is causing tension in bond markets. The yield on U.S. six-month T-bills
TMUBMUSD06M,
5.379%
jumped to 5.412%, up more than 40 basis points over the past month and the highest level since 2000.The yield on 2-year Treasurys rose for the ninth consecutive session on Tuesday, a day after St. Louis Fed President James Bullard said he would like to see two more quarter-of-a-percentage-point interest-rate hikes this year. Markets are pricing in a 73% probability that the Fed will leave interest rates unchanged between 5%-5.25% on June 14, according to the CME FedWatch Tool. Traders also see a 27% chance that the Fed will deliver another quarter-point hike instead next month, according to 30-day Fed Funds futures.What analysts are saying “Despite talk of an imminent recession, 10y yields are trading north of 3.5%, well above the levels that prevailed pre-COVID. We argue this reflects a confluence of factors,” said Anshul Pradhan, Samuel Earl and Demi Hu of Barclays. Some of them are “that the recession is likely to be very mild and investors [are] demanding a positive term premium for uncertainty.”

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