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Treasury Yields Rise as Fed Comments Temper Rate Cut Bets

3 weeks ago

Investors are recalibrating their expectations for US rate cuts in response to rising Treasury yields and hawkish comments from a Federal Reserve official. Resilient consumer confidence data and higher rates in the US have heightened the risk of prolonged elevated rates. Remarks from Fed’s Neel Kashkari highlighted the central bank’s restrictive policy stance, with the possibility of additional rate hikes still on the table.

Bond traders may find relief as the Treasury Department initiates a series of buybacks targeting seasoned and less liquid debt starting Wednesday, the first such move since the early 2000s. In June, the Federal Reserve will commence tapering the pace of its balance-sheet reduction, known as quantitative tightening (QT).

The Fed’s preferred inflation gauge, the core Personal Consumption Expenditures (PCE) Price Index, is expected to show modest relief from persistent price pressures. Economists forecast a 0.2% rise in April, the smallest increase this year, offering a clearer view of underlying inflation trends. Swap contracts currently price in around 30 basis points of Fed rate cuts for 2024, equivalent to one reduction, reflecting historical increments of 25 basis points.

As the week unfolds, market participants will closely watch these developments for signals on the future direction of US monetary policy.

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