US 2-Year Yield Hits 4.857% on 3.5% Inflation Fears, Fed Patience

Key Takeaway

• US two-year Treasury yield hits week's high at 4.857% due to rising consumer inflation expectations, now at 3.5%.
• Fed officials emphasize patience, suggesting it's too early for rate cuts amid stubbornly high inflation levels.
• Strong Canadian employment data also pressures US short-term yields upwards, reflecting interconnected market anxieties.

Inflation Expectations Stir Treasury Yields

Treasury yields, particularly the two-year note, experienced a notable increase, reaching the peak level of the week. This movement was primarily triggered by a surprising uptick in consumer inflation expectations reported by the University of Michigan's latest sentiment survey for May. The survey indicated that consumers now anticipate a 3.5% inflation rate over the next year, a rise from the 3.2% expectation set in April. This adjustment in expectations comes ahead of data forecasts suggesting a potential deceleration in inflation to 3.4% for the previous month.

Fed's Patience on Rate Cuts

The Federal Reserve's stance on interest rates remains one of caution and patience, as highlighted by recent comments from Fed officials. This approach has been influenced by the ongoing challenge of bringing inflation back to the Fed's 2% target. The persistence of inflationary pressures has dampened hopes for imminent interest rate reductions. Dallas Fed President Lorie Logan emphasized this cautious outlook, stating it's "just too early to think about cutting rates." These sentiments underscore the Fed's commitment to a measured response to inflationary trends, despite market pressures for rate adjustments.

CPI Data Anticipation and Global Influences

The anticipation of the Consumer Price Index (CPI) data for April is building, with expectations pointing towards inflation remaining at high levels. Lindsey Piegza, Chief Economist for Stifel Financial Corp., expressed skepticism about a quick resolution to inflationary pressures, suggesting that both the Fed and investors might have to wait longer for significant relief. Additionally, external factors such as a larger selloff in Canadian government bonds, driven by unexpectedly strong April employment data, have contributed to the upward pressure on US short-term yields. This international dimension adds another layer of complexity to the US Treasury market's dynamics.

Street Views

• Stefan D’Annibale, Odeon Capital Group (Neutral on front-end Treasuries):

  "Front-end Treasuries are not reacting well to the higher inflation expectation readings and Fed comments that reinforced the patience narrative."

• Lindsey Piegza, Stifel Financial Corp. (Neutral on US inflation outlook):

  "Consumer price index data for April will likely show inflation staying at 'stubbornly high levels'... The Fed and investors alike are looking for meaningful reprieve for inflation. But unfortunately I think they’re going to need to wait some time longer."

Management Quotes

• Lorie Logan, Dallas Fed President:

  "It’s just too early to think about cutting rates."