U.S. Treasury bond yields have declined markedly, while market participants are preparing for the Fed meeting and the publication of important U.S. economic data that will help assess the current state of the economy.
The yield on 5-year Treasury bonds fell by 3.7 basis points, reaching 4.655%, while the yield on 30-year bonds was 4.742% (-4.0 basis points). Meanwhile, the yield on 2-year Treasury bonds, reflecting expectations of short-term interest rates, decreased by 2.7 basis points to 4.973%, while the yield on 10-year bonds fell to 4.628% (-4.1 basis points). The curve between the 10-year Treasury yield and the 2-year yield remains inverted, sending a warning that the economy may be falling or has already fallen into recession. Now the gap between 10 and 2 year U.S. debt is 35 basis points.
As for the Fed meeting, economists expect interest rates to remain unchanged, with investors' focus on policy guidance from the central bank, which could contain clues about how many rate cuts will take place this year and when they might begin. This comes as recent economy data has suggested resilience from the economy and persistent inflationary pressures. Market pricing shows a first Fed rate cut is expected in September, with just over 30 basis points worth of easing expected this year. According to the CME FedWatch Tool, markets see a 11.5% probability of a 25 basis point rate cut at the Fed meeting in June, and a 30.7% probability of a rate cut in July.
In addition to the Fed meeting, the focus will also be on data on the US labor market, namely ADP's private payrolls report (on Wednesday), JOLTS job openings report (on Wednesday) and nonfarm payrolls data (on Friday). These data will help to understand how high interest rates and sustained inflation have affected the labor market and the economy as a whole. According to forecasts, the unemployment rate did not change in April (3.8%), and the nonfarm payrolls rose by 210 thousand after an increase of 303 thousand in March.