- The yield on the US two-year Treasury note rose by 5.1 basis points to 3.998%, while the benchmark ten-year Treasury yield climbed 5.3 basis points to 4.465%, with the yield curve spread reported at 46.5 basis points.
- The April Consumer Price Index showed persistent inflation, combined with non-farm payrolls adding 115,000 jobs, far exceeding the expected 62,000. Federal funds rate futures have begun pricing in the possibility of a rate hike in March next year.
- Geopolitical disruptions and US President Donald Trump's statements on a ceasefire agreement have driven up energy costs, while demand was tepid for the US Treasury's $42 billion ten-year bond auction.
Data Perspective: Sticky Inflation and Employment Exceeding Expectations
The US Treasury market experienced significant adjustments amid the resonance of multiple macroeconomic data. April's Consumer Price Index data indicated that while inflationary pressures from tariffs on goods are waning, rising energy costs have become a new variable driving up overall prices. Matt Bush, an economist at Guggenheim Investments, noted that spillover effects from AI-related spending are also marginally impacting macroeconomic data. Additionally, strong employment market data further dampened recent expectations for rate cuts. Last month, employers added 115,000 jobs, nearly double economists' expectations. If the labor market maintains its current heat, the room for a decline in risk-free rates may be limited.
Policy Perspective: Personnel Changes and Monetary Path Projections
With the dual support of inflation and employment data, market expectations for the Federal Reserve (Fed) to maintain current interest rates or even resume rate hikes are heating up. The distribution of positions by federal funds rate futures traders shows that the market has now priced in the probability of a rate hike in March next year into asset pricing models. Meanwhile, the US Senate has officially confirmed Kevin Warsh as a member of the Federal Reserve Board for a 14-year term. This personnel change is seen by the market as an important forward indicator of his potential future succession of Jerome Powell as Fed Chair, and the long-term hawk-dove balance of the Monetary Policy Committee may face recalibration.
Funding Perspective: Bond Issuance Impacting Market Liquidity
Pressure on the supply side of sovereign debt is becoming apparent. The results of the US Treasury's $42 billion ten-year bond auction showed limited market willingness to take on the bonds. The winning yield of this auction was about 0.5 basis points higher than pre-auction trading levels, with a bid-to-cover ratio of only 2.40 times, the lowest since February this year. The previous $58 billion three-year bond auction also faced weak demand. If the upcoming $25 billion thirty-two-year bond auction continues to be under pressure, the widening of term premiums may further push up long-term borrowing costs.
