U.S. Treasury bond yields have declined markedly, while market participants looked for more clarity around the U.S. debt ceiling negotiations and the Fed's interest rate path.
The yield on 5-year Treasury bonds fell by 4.2 basis points, reaching 3.704%, while the yield on 30-year bonds was 3.921% (-2.7 basis points). Meanwhile, the yield on 2-year Treasury bonds, reflecting expectations of short-term interest rates, fell by 5.0 basis points to 4.239%, while the yield on 10-year bonds declined to 3.661% (-3.1 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 58 basis points.
President Joe Biden and House Speaker Kevin McCarthy will meet in person at the White House Monday to resume negotiations around the debt ceiling. Raising the debt ceiling is necessary for the government to cover spending commitments already approved by Congress and the president to prevent default. Raising the debt ceiling does not authorize new spending, but Republicans in the House of Representatives have said they will not raise the limit unless Biden and lawmakers agree to spending cuts in the future.
Meanwhile, recent statements by Fed policymakers have increased uncertainty about the prospects for further tightening of monetary policy. Fed Chairman Powell said on Friday that tightening credit conditions means that "the interest rate may not need to be raised as much as it would otherwise be to achieve the Fed's goals." However, he reiterated that rate decisions would be made "meeting by meeting." According to the CME FedWatch Tool, markets now see an 11.6% chance that Fed rates will be raised by 25 basis points in June, compared with 17.4% on Friday. More central bank speakers are due to speak today ahead of the release of minutes from the Fed’s last meeting on Wednesday.