US business Treasury Yields Surge Amidst Strong Activity

US business Treasury Yields Surge Amidst Strong Activity

Yields in the Treasury market witnessed a significant surge as data showcasing robustness in US business activity and a constricted labor market prompted traders to adjust their expectations for Federal Reserve interest-rate reductions.

Two-Year Yield Hits Peak Since May 2

The Fed-sensitive two-year yield soared over 8 basis points, reaching 4.95%, its highest level since May 2. Simultaneously, rates across various maturities rose by a minimum of 5 basis points, resulting in a flattening of the yield curve. However, trading volume remained subdued as US markets braced for closure in observance of Memorial Day on Monday, leading to below-average activity heading into the extended weekend.

The surge in two-year yield to 4.95% signals market anticipation, while Memorial Day dampens trading, Barron’s Print Edition said.

Accelerated US Business Activity

Thursday’s data showed a rapid surge in US business activity in early May, the fastest in two years. This followed a decrease in initial applications for unemployment benefits, reinforcing signs of a strong economic rebound. The narrative of robust recovery gains further support with these developments.

Market Sentiment Reflects Fed Apprehension

Andrew Brenner, NatAlliance Securities LLC’s head of international fixed income, emphasized traders’ concerns about the Federal Reserve’s position. Overnight index swaps for future Fed meetings now predict a quarter-point rate increase in December, contrary to prior expectations. The shift occurred within a day, previously forecasting a hike in November.

Adjusted Projections for Rate Reductions

Moreover, contracts imply 33 basis points rate reductions for 2024, down from about 39 at Wednesday’s close. Intensified selling on Treasuries followed Wednesday’s sell-off after Fed meeting minutes release. Minutes disclosed “many” officials doubting current policy’s effectiveness in reducing inflation, escalating market uncertainty. Volatility surged, fueled by doubts about policy’s ability to meet inflation targets. Market reacted strongly to Fed’s uncertain stance.

Gain 2 years of comprehensive digital access to The Economist and The Wall Street Journal. Enjoy daily news content, including The Economist Today, Weekly, Archives, and more, across iOS, Android, PC, and Mac. Sign up now for 77% off.

Sales Support