Bond Report: Treasury yields nudge lower as chance of 25 basis point rate hike in May tops 90%

Bond yields were a fraction softer early Tuesday as traders expressed increasing certainty of just one more rate rise by the Federal Reserve this cycle.

What’s happening
  • The yield on the 2-year Treasury TMUBMUSD02Y, 4.173% fell by 2.1 basis points to 4.182%. Yields move in the opposite direction to prices.
  • The yield on the 10-year Treasury TMUBMUSD10Y, 3.591% retreated 1 basis point to 3.597%.
  • The yield on the 30-year Treasury TMUBMUSD30Y, 3.804% fell less than 1 basis point to 3.808%.
What’s driving markets

News that the Chinese economy grew by a faster-than-expected 4.5% in the first quarter failed to push Treasury yields higher.

The meager moves are in keeping with recent sessions as traders await fresh catalysts and express increasing conviction that evidence of easing inflation, but a resilient economy, will encourage the Fed to raise borrowing costs again next month.

Markets are pricing in a 91.4% probability that the Fed will raise interest rates by another 25 basis points to a range of 5.0% to 5.25% after its meeting on May 3rd, according to the CME FedWatch tool.

The central bank is expected to take its Fed funds rate target back down to 4.6% by December, according to 30-day Fed Funds futures.

U.S. economic updates set for release on Tuesday include March housing starts and building permits at 8:30 a.m. Fed Governor Michelle Bowman is due to speak at 1 p.m. All times Eastern.

What are analysts saying

“With the policy rate near the zone of ‘sufficiently restrictive’ and credit conditions continuing to tighten, there are emerging signs of disagreement among Fed officials about when to pause the tightening cycle,” said researchers at Deutsche Bank led by economist Amy Yang.

“Chicago Fed President Goolsbee delivered one of the more dovish speeches we’ve heard of late. He advocated for prudence and patience and appeared to be more cautious about further hikes…On the other hand, NY Fed President Williams continued to endorse the March SEP median – which saw one more 25bps hike as a baseline – as ‘reasonable’ given continued strong inflation.”

“In our view, with the acute phase of banking stress appearing to fade (at least for the time being) and another strong inflation report, we expect the Fed to deliver a final 25bps hike and hold steady at 5.1% through year end, before beginning to cut rates in January 2024,” Deutsche concluded.

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