US Treasury bond yields mostly rose, while market participants were cautious amid uncertainty around the increase in the US debt ceiling. The Fed's monetary policy prospects also remained in focus.
The yield on 5-year Treasury bonds grew by 2.0 basis points, reaching 3.787%, while the yield on 30-year bonds was 3.967% (-0.4 basis points). Meanwhile, the yield on 2-year Treasury bonds, reflecting expectations of short-term interest rates, increased by 4.7 basis points to 4.369%, while the yield on 10-year bonds increased to 3.726% (+0.7 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 64 basis points.
Yesterday, President Joe Biden and House Speaker Kevin McCarthy ended talks without reaching an agreement. However, they will continue their negotiations. Unless a deal is struck, the U.S. risks defaulting on its debt as soon as June 1, a deadline which Treasury Secretary Janet Yellen reiterated Monday.
As for the Fed's monetary policy outlook, money markets expect a pause of the Fed's tightening cycle in June. However, St. Louis Fed President James Bullard and San Francisco Fed President Mary Daly suggested that more rate hikes starting next month were possible. Analysts fear that the Fed may not be done with its hiking cycle and that a more resilient economy than expected will catch markets off guard once again. According to the CME FedWatch Tool, markets now see a 15.3% chance that Fed rates will be raised by 25 basis points in June, compared with 25.7% yesterday.
Investors are also preparing for the publication of the PMI indices for May (at 13:45 GMT) and the report on new home sales for April (at 14:00 GMT). Economists expect the manufacturing PMI fell to 50.0 from 50.2 in April, the services PMI fell to 52.6 from 53.6, and new home sales declined to 0.665 million from 0.683 million in March.