- Macroeconomics | Central Bank Policy | Global Markets
- The major indices of the U.S. stock market plummeted, triggering a rise in risk aversion, with funds flowing into the U.S. Treasury market. This pushed the benchmark 10-year Treasury yield slightly lower to 4.493%, reflecting a repositioning of risk assets after the Federal Reserve's hawkish stance.
- The yield on the more rate-sensitive two-year Treasury slightly retreated to 4.19%, but remains near a 16-month high. The market is closely watching the upcoming release of the May core PCE price index to gauge the future path of interest rate hikes.
The U.S. Treasury's $69 billion auction of two-year notes saw strong demand, with the winning yield reaching its highest since January 2025. The week's total supply pressure of $183 billion in short- and medium-term Treasuries is beginning to show.
Stock Market Valuation Correction Drives Safe-Haven Buying
The sharp decline in the semiconductor sector led the Nasdaq and S&P 500 indices to fall to over a one-week low, raising investor concerns about the outlook for AI capital expenditures primarily financed by debt. This repositioning of risk assets directly flowed into the fixed income market. The benchmark 10-year U.S. Treasury yield fell by 1.41 basis points to 4.493% during the day, indicating a temporary resurgence in the appeal of government bonds as traditional safe-haven assets when equity market valuations are under pressure.
Fed Forward Guidance Diminishes, Amplifying Economic Data Variables
Since the Federal Reserve kept rates unchanged at its policy meeting and hinted at possible further rate hikes this year, the bond market has been under pressure. Notably, the Fed removed forward guidance on future rate paths from its latest policy statement, interpreted by the market as a shift in policy style under new Chairman Kevin Warsh. In the absence of forward guidance, short-term bonds have become significantly more sensitive to macroeconomic high-frequency data, with the spread between two-year and 10-year Treasury yields widening to 30.3 basis points.
Inflation Data Window and Treasury Supply Pressure
The market's focus has fully shifted to the upcoming release of the May Personal Consumption Expenditures (PCE) price index. The market expects the core PCE to rise by 3.4% year-on-year, with overall PCE climbing 4.1% year-on-year. If core inflation data exceeds expectations, the market's pricing of the Fed's rate path may face reassessment. Meanwhile, supply-side pressure is also mounting, as following Tuesday's two-year Treasury auction, the Treasury will continue with auctions of a total of $114 billion in five-year and seven-year notes on Wednesday and Thursday, testing the primary market's absorption capacity.
