NEW YORK, June 8 – Treasury bond yields showed varied performance Monday following Friday’s robust employment report that strengthened expectations for Federal Reserve interest rate increases later this year.
Previously, worries about weakening employment conditions were viewed as limiting potential rate hikes, despite inflation remaining above the Fed’s annual 2% goal. Friday’s employment figures changed this outlook, with fed funds futures traders now assigning a 70% probability to rate increases by December.
“The front end now of the Treasury yield curve has priced in a rate hike,” stated Kevin Flanagan, head of investment strategy at WisdomTree.
However, Flanagan noted, “I don’t think the Fed is there yet.”
“I think you would need to see more jobs reports and CPI reports like we’re going to get this week that would suggest perhaps that the Fed does need to make that move and move policy back into a rate hike mode,” Flanagan explained.
Rising oil costs due to supply interruptions from the Iran war have heightened concerns that inflation could become more deeply rooted in consumer pricing.
However, numerous market watchers view Fed rate increases as improbable unless inflation expectations climb higher and inflation becomes embedded in core consumer costs.
“We do have this obvious push from energy inflation that’s increasing the headline numbers and pushing us further away from target. But I think on the other side of this, there is a pretty steep decline in energy prices that’s eventually going to come,” explained Thomas Simons, chief U.S. economist at Jefferies.
Simons anticipates consumer price inflation will drop below 2% within twelve months as this year’s inflation increases make next year’s numbers appear lower through comparison.
Wednesday’s consumer price inflation figures are projected to reveal that core consumer prices moderated monthly in May to 0.3% from April’s 0.4%, while increasing annually to 2.9% from 2.8% during the period, based on Reuters economist surveys.
Two-year note yields, which generally track Fed rate expectations, decreased 0.9 basis points to 4.153%.
Benchmark 10-year note yields increased 1.4 basis points to 4.55%.
The spread between 2-year and 10-year notes widened to 39.4 basis points.
The Treasury plans to auction $119 billion in new coupon-bearing securities this week, consisting of $58 billion in three-year notes Tuesday, $39 billion in 10-year notes Wednesday, and $22 billion in 30-year bonds Thursday.
