US Treasuries
- The 10-year Treasury yield is currently 4.50%, 1 basis point higher since last Tuesday. 10-year bonds traded in a 10.5-basis point range (4.425% - 4.53%) this past week.
- 2-year Treasuries are at 4.07% this morning, higher by 2 basis points since last Tuesday.
Trading Recap – Treasury bonds continued to trade on the news about the Iran war and improved with headlines suggesting that the US and Iran were getting close to an extension of the ceasefire that would allow the Strait of Hormuz to reopen. However, no deal had materialized, and key issues, such as control over the Strait and the disposition of Iran’s uranium stockpile, remain unresolved and far apart. Yields moved higher this morning (along with crude oil) with the news that Iran has halted communication with the US regarding extension of the ceasefire.
Last Week’s Economic Data (Selected Highlights)
- PCE Price Index (April) – The headline PCE inflation index printed at +0.4% for the month, one-tenth below the forecast and lower than March’s print of 0.7%. Year-over- year, PCE headline inflation is at 3.8% (matching the forecast and 0.3% higher than in March). Core PCE inflation (without food and energy prices) was 0.2% for the month and 3.3% year-over-year. The low core PCE print for April suggests that the crude oil spike has not bled into other goods and services.
- Gross Domestic Product 2026 Q1 2nd read – GDP in the 1st quarter expanded at 1.6%, revised down by 0.4% from the previous estimate.
- Weekly Initial Jobless Claims: For the week ending May 23rd, unemployment claims printed at just 215k, higher by 5k versus the previous week at 210k. New unemployment claims remain in a range that is consistent with a stable labor market.
Fed Monetary Policy
Fed funds rate remains at 3.62% (target range 3.50% -5.75%), the same level since December. The Federal Reserve is likely to keep rates unchanged at the next FOMC meeting (June 16th and 17th) and remove its prior easing bias from their monetary policy statement. There is no economic data to justify rate cuts. Inflation remains elevated at around 3.5% year-over-year, with monthly readings accelerating –most notably a sharp rise in PPI for the month of April, up +1.4% on a headline basis and 1.0% core. This is with a backdrop of the Iran war unresolved, high crude oil prices and a labor market that continues to show strength.
As implied by the yield curve, no change is expected at the June 17th FOMC meeting. The bond market is implying a 0.143% increase by the end of 2026 and upwards of 0.25% by the FOMC meeting on April 28, 2027.
My Take on Longer Term Yields
We saw the link between Treasury bond yields and crude oil prices in full display this past week as headlines presented the possibility of a 60-day extension of the ceasefire, along with crude oil shipments resuming with the reopening of the Strait of Hormuz. However, there has been no breakthrough agreement. The markets will continue to speculate on when an agreement can come together; this will help rates hold the line below 4.50%. If an agreement is reached to allow crude oil shipments to resume, interest rates will likely move lower to 4.25% - 4.35%, quickly.
After the standoff in the Strait is resolved, 10-year yields at about 4.25% will reflect concern that inflation at 3.50% +/- may remain stubborn. To see further improvement in yields, we will need to see improvement in crude prices and inflation trends.
This Coming Week’s Economic Data
“Jobs Week” with JOLTS (job openings) on Tuesday, ADP jobs report on Wednesday, weekly unemployment claims Thursday and on Friday, the highlight - May’s US employment (and the unemployment rate). The Wall Street consensus estimate for May non-farm payroll job gains is +89k; that’s after job gains of +115k in April and an outsized +185k in March. The unemployment rate is expected to remain at 4.3%.
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