US Treasuries
The 10-year Treasury yield is currently 4.58%, higher by 11 basis points since last Monday morning. 10-year bonds traded in a 15-basis point range (4.45% - 4.60%) this past week.
2-year Treasuries are at 4.22% this morning, 10 basis points higher on the week.
Trading Recap
Treasury yields sold off early last week, with the 10-year Treasury yield moving to ~4.60%. Investors reacted to renewed US-Iran military conflict and a sharp rise in crude oil prices. The bond market focused on the inflationary implications of higher crude oil prices and the potential for elevated inflation expectations to delay Federal Reserve easing.
The FOMC minutes released Wednesday reinforced expectations for a cautious policy path (higher for longer). Yields are tracking crude oil prices - moderating to 4.55% late last week as oil prices stabilized and moving back higher this morning towards 4.60% (with WTI crude oil moving higher by 3% to $73.66/barrel).
Last Week’s Economic Data (Selected Highlights)
Last week's economic calendar was relatively light. Investors focused primarily on the renewed military conflict between the US and Iran and the inflation implications.
- ISM Services Index (June) – 54 as forecasted versus 54.5 for May; consistent with continued expansion in the service sector.
- Weekly Initial Jobless Claims - For the week ending July 4, unemployment claims printed at 215k; marginally lower than 217k the previous week, as revised. The 4-week moving average shows just 218.75k, a muted level that is consistent with a solid labor market.
Fed Monetary Policy
The consensus view remains that the Federal Reserve is “on hold.” While inflation is above target, Fed officials continue to emphasize a data-dependent approach. Fed Chair Warsh presented an inflation-fighting tone after June's FOMC meeting and indicated the need for additional economic data before adjusting monetary policy. The FOMC minutes released last Wednesday reminded investors that Fed officials remain concerned about inflation and are certainly not eager to cut rates.
The low June non-farm payroll (just +57k job growth) and unemployment rate at 4.3% are consistent with a labor market that is cooling rather than deteriorating materially. With inflation, the Fed and investors are focused on the effects of lower crude oil prices, diminishing tariff-related price pressures as well as inflation pressure from technology-sector price increases, and potential price increases in healthcare. June CPI will be released tomorrow and PPI on Wednesday; the Fed and markets will be looking to see if recent inflation is transitory or becoming more broadly embedded in the core level.
Fed funds rate is currently 3.62%, 3.50%-3.75% range. As implied by the shape of the yield curve, investors have fully discounted any rate hike at the end of July but imply a rate increase in the 4th quarter, maybe as early as October 28th. A rate increase of 0.37% on or before the Fed meeting on December 9 is implied by the yield curve. Fed Funds are expected to remain relatively stable in 2027.
My Take on Longer Term Yields
Last week I presented an “alternative narrative” for 10-year rates remaining higher with the possibility of the Iran war resuming, pushing crude oil prices back higher and diminishing expectations of an improvement in inflation. With the recent exchange of military strikes between Iran and the US and the resulting jump in crude oil prices, the alt narrative has taken center stage for the time being. I’m encouraged that crude oil prices, while higher than the recent low, haven’t moved back to the ~$100/barrel level (for NY WTI Crude) in mid-May.
We will see how June CPI and PPI inflation print tomorrow and Wednesday. The consensus estimate is for CPI to actually print negative -0.1% month-over-month (versus an outsized +0.5% in May). Also, watch for Core CPI; expected to print at +0.2% for the month (same as May). CPI year-over-year is expected to improve to 3.8% (versus 4.2% as of May). June Core CPI YoY is expected to print at 2.9%, the same as the May print.
We will need headline inflation to move back substantially towards 3% for 10-year yields to move back towards 4.25% or lower. For the time being, expect the 10-year yield near or above current levels.
This Coming Week’s Economic Data
This week's economic calendar is headlined by CPI inflation (tomorrow) and PPI (Wednesday). Other hard data releases include Retail Sales, weekly Initial Jobless Claims, and several housing indicators, including the NAHB Housing Market Index, Housing Starts, and Building Permits. Friday also features Industrial Production, Manufacturing Production, and Capacity Utilization.
Soft data surveys include the Fed Beige Book on Wednesday and several regional activity surveys throughout the week, including Empire Manufacturing, New York Fed Services Business Activity, and Philadelphia Fed Business Outlook. The week concludes with the University of Michigan Consumer Sentiment survey, including its closely watched 1-year and 5-year inflation expectations readings.
Fed official Chris Waller speaks today at 12:30 in New York about his economic outlook. Tuesday and Wednesday, Fed Chair Warsh will make his first appearance on Capitol Hill with his two-day Humphrey-Hawkins testimony to House and Senate banking committees.
The information provided in this article, including, without limitation, any opinions, predictions, forecasts, commentaries or suggestions, is for informational purposes only and should not be construed to be professional or personal investment, financial, legal, tax or other advice.