Bond Report: 10-year Treasury yield climbs to nearly two-week high to start trade in June

U.S. government bonds yields rose Tuesday, pushing the 10-year benchmark bond to the highest level in almost two weeks as investors watched crude oil prices hit a two-year high and digested a report on manufacturing activity that highlighted mounting pricing pressures and supply-chain bottlenecks.

How Treasurys are performing
  • The 10-year Treasury note yield

    rose 2.1 basis points to 1.613%, reaching its highest level since May 21, according to Dow Jones Market data.
  • The 30-year Treasury bond

    was yielding 2.296%, up 2.5 basis points and bringing the long bond to its highest rate since May 24.
  • The 2-year Treasury note

    wa yielding 0.147%, up 0.4 basis point from Friday.
Drivers in the fixed-income market

U.S. bond yields drifted higher Tuesday as long-duration bond yields climbed at a faster clip than shorter-dated debt, a phenomenon in the bond market known as a “bear steepener” trade, indicative of investors’ longer-term inflation fears.

Debt yields may continue to drift higher until Friday’s U.S. May employment report after the Federal Reserve’s preferred inflation gauge rose to a 13 year high in April in data last week.

The Institute for Supply Management said its manufacturing index rose to 61.2% in May from 60.7% in April. New orders paced the rise, while production and hiring slowed, reflecting emerging pressure points for prices and inflation. Investors continue to focus on the state of inflation in the U.S. as the economy recovers from the COVID pandemic.

However, Federal Reserve officials have continued to try to assuage market anxieties by saying that the central bank will be prudent in its monetary policy as the economy rebounds from COVID.

Fed Gov. Lael Brainard, speaking at the Economic Club of New York this afternoon, said that inflation is likely to be temporary—a persistent refrain among policy makers.

“Remaining steady in our outcomes-based approach during the transitory reopening surge will help ensure the economic momentum that will be needed as current tailwinds shift to headwinds is not curtailed by a premature tightening of financial conditions,” Brainard said.  

Randal Quarles, the Fed’s vice chair for supervision, indicated Tuesday during an interview with Politico made similar remarks on the transitory nature of pricing pressures, according to a Reuters report.

Meanwhile, crude-oil prices rose the highest level in more than two years, after a meeting of Organization of the Petroleum Exporting Countries and its allies kept in place an existing plan to gradually increase oil production through July.

Higher oil prices

can weigh on government debt yields because they point to a rise in pricing pressures which can be anathema for Treasury debt’s fixed value.

Meanwhile, U.S. Transportation Secretary Pete Buttigieg said President Biden and members of his team would continue negotiating with Republicans over a $1.7 trillion infrastructure plan but said that progress needs to be made before Congress returns on June 7.

What fixed-income strategists are saying

“Investors are waiting for a catalyst,” wrote Lauren Goodwin, economist and portfolio strategist at New York Life Investments, in a report published June 1.

“Bond yields have stopped rising because inflation expectations have stopped rising. Global stocks continue to challenge record highs, but cyclical leadership has temporarily softened, and investors remain sensitive to the risks. Investors appear to be waiting for a sign as to which market narrative—transitory or overheating—will win out,” the analyst wrote.

“April’s jobs report reminded investors of the volatility and unpredictability of economic data as the economy sorts through an unprecedented recovery. I expect Friday’s May jobs report to be strong, but the Fed and the market may not read the report the same way,” the economist noted.  

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