By Serafino Tobia, Director of Agency CMBS Trading and Portfolio, Greystone
US Treasuries
10-year Treasuries are at 4.32% as of this morning, 4 basis points higher since last Monday morning. 10-year bonds traded in a 21-basis point range this past week (4.12% - 4.33%). Yields improved early in the week with economic data showing some softness as well as jawboning for lower rates from President Trump and Treasury Secretary Bessent. After Thursday morning’s benign PCE inflation print, the 10-year rate traded as low as 4.12% with trader/investor sentiment reflecting a possibility that the Fed could start interest rate cuts soon. However, with news about positive developments with the US and China talking about starting trade talks and with a respectable US non-farm payroll print (and unemployment steady at 4.2%), traders/investors that were front-running a Fed rate cut stepped back and yields moved higher; 10-year yields moved as high as 4.33% on Friday.
Likely Near-Term Factors to Watch
Certainly, bond yields will fluctuate as we get further information on the progress of tariff/trade negotiations, the health of the economy, inflation trends and the Federal Reserve’s timing and rationale for cutting interest rates. Additionally, keep a focus on:
Potential Product Shortages due to Tariffs - Markets may not yet have fully priced in the risk of product shortages resulting from escalating tariffs, but we could begin seeing product shortages within 1–2 months due to what is effectively a trade embargo with China and several other countries. Gene Seroka, Executive Director of the Port of Los Angeles, commented to Bloomberg Surveillance on Friday that if the standoff with China persists much further, spot shortages in retail stores could begin within 5–7 weeks as existing inventories are exhausted. Even if shipments resume immediately, the logistics involved with trans-Pacific transport and domestic distribution will result in delays, keeping shelves understocked for a while. This situation could lead to a decline in the stock market and a corresponding improvement in Treasury yields. At the very least, the onset of actual shortages might prompt the administration to accelerate trade negotiations.
Hard Data versus Soft Data - There’s a substantial disconnect between hard and soft economic data. Hard data—such as inflation figures, employment, and overall economic activity—continues to show gradual improvement, with inflation gradually declining and the economy remaining stable. In contrast, soft data—forward-looking surveys measuring consumer and business sentiment—indicates rising concerns about inflation and a potential economic slowdown, largely in response to trade and tariff uncertainties. Traditionally, both Treasury investors and the Federal Reserve have relied heavily on hard data to assess economic health. However, since hard data is inherently backward-looking, it does not yet reflect the uncertainty and disruptions stemming from ongoing trade tensions. The key question now is: is this the calm before the storm? Many economists think yes; the stability in the economy reflects the pull-forward of trade activity before tariffs and higher prices kick-in and a slower economy is just a few weeks away. We shall see.
Last Week’s Economic Data
Data last week was mixed but overall reflects a stable economy. The 0.3% contraction in Q1 GDP was due to larger imports, driven by businesses front running tariffs. The Fed’s preferred inflation measure PCE index showed further easing. The US employment figures on Friday were healthy and overshadowed the weakness in the JOLTS report, ADP jobs data and higher jobless claims.
- JOLTS report - The March job openings printed at 7.2 million, lower than the consensus estimate of 7.5 million. The higher number indicates stronger demand for labor -- the pre-pandemic 2019 average was 7.15 million; job openings were over 12 million during the pandemic.
- ADP Employment Report - ADP reported March private payroll at +62,000 jobs, substantially below the pre-announcement economists’ consensus estimate of +115k and less than half of last month’s +147k job growth, as revised.
- GDP Report – Q1 Gross Domestic Product (GDP) first read, printed at -0.3% annualized pace. In large part, the contraction is attributed to high imports as businesses stockpiling goods ahead of Trump's tariffs (imports are a deduction in the calculation of GDP). On its face, the negative GDP print raises concern about a potential recession but if you normalize imports and inventory growth, production is relatively healthy at over +2%.
- PCE inflation Index – Both the headline and core measure of the PCE Index for March were flat month-over month. The headline PCE index for the year printed at 2.3% versus the revised level as of last month at 2.7%. Core PCE year-over came in at 2.6% versus last month at 3%, as revised.
- Weekly Initial Jobless Claims –Initial Jobless Claims were higher than expected at 241,000 versus the pre-announcement estimate at 223k and last week’s print at 223k, as revised. This print is the highest reading since the 3rd week in February (243k) which proved to be a statistical outlier. The 4-week moving average is 226k. Readings close to 200k indicate a healthy labor market; prints at 250k or above are concerning and suggest a softening labor market.
- ISM Manufacturing Index – For April, the Index printed at 48.7, lower than last month (49) and higher than the consensus estimate (47.9). Not particularly concerning but prints below 50 represent economic contraction.
- US Employment Report – April non-farm payroll printed +177,000 new jobs, relatively strong and higher than Wall Street’s estimate at +138k. March’s print was revised lower to +185k, originally reported at +228k). The unemployment rate remained unchanged at 4.2%. Average Hourly Wages (i.e., wage inflation, also part of the labor report), moved higher by 0.2% for the month versus 0.3% the previous month.
Fed Monetary Policy – On Hold
Fed officials are in a blackout period and not making any public comments until after this Wednesday with the announcement of the FOMC rate decision at 2 PM and Fed Chairman Powells press conference starting at 2:30. However, the jaw boning for the Fed to cut interest rates continues out of the White House. Treasury Secretary Bessent commented that the Fed should be cutting rates based on the shape of the yield curve (with 2-year rates below Fed Funds rates). While the fact that overnight rates are higher than 2-year rates signal that the market expects yields to move lower, it doesn’t necessarily signal that the Fed should start cutting. The real debate is whether the Fed should be front-footed and start cutting rates to avoid a recession or if they should maintain higher rates given the uncertainty about inflation and the likely impact of the President’s tariff policy and possibly upcoming tax cuts and deficit spending.
The overnight Fed Funds rate remains set at 4.33% (4.25% - 4.50% target range). Don’t expect any rate cut on Wednesday; the Fed is on hold and while leaning towards rate cuts, it first needs a sign of a slowing economy in the hard data. The healthy US payroll report on Friday gives the Fed additional cover to stay in a wait-and-see mode. There is an argument that improving PCE inflation figures allows the Fed to move forward with preemptive rate cuts to prevent a recession. However, in the current context, with the recent debate with Trump talking about removing Powell as Fed Chairman and Powell defending the Fed's independence, a rate cut is unlikely, as it could appear politically motivated. Based on the shape of the yield curve, the market is expecting just 3 rate cuts this year with the first 0.25% cut not until the FOMC meeting on July 30th (skipping both the May 7th and June 18th FOMC meetings).
My Take on Longer Term Yields
10-year Treasuries should continue to move lower towards 4%. We saw some evidence of improving yields this past week; 4.12% on Thursday after the better PCE inflation figures. However, the US jobs report on Friday didn’t cooperate and printed strongly; yields moved back higher. We are likely to see progress on trade deals which could forestall yields moving lower. However, expect a substantive level of tariffs remaining in place which will result in a one-time inflation hit and reduced trade activity. With both tariff-related inflation and a weaker economy (i.e., stagflation), I expect the Fed to look through tariff-related inflation and move forward with rate cuts to address the economic weakness. Until we get some weaker hard data, expect the Fed to stay on hold and for interest rates to remain range-bound at around 4.25%.
This Week’s Economic Data
The economic calendar is light this week; we get S&P Global PMI and ISM Services PMI indices this morning. The highlights this week will be the Fed Funds rate decision out of the FOMC (and Fed Chairman Powell’s press conference) on Wednesday afternoon. And of course, the markets will be keen on any progress or setback with tariff/trade negotiations.
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