Bond Report: 2-year Treasury yield climbs on remarks by Fed’s Waller, but still has biggest monthly drop since March 2020


Yields on 2- and 10-year U.S. Treasurys got a lift on Tuesday from a hawkish speech by a Federal Reserve official over the Memorial Day holiday, but still finished the month lower amid concerns about the growth outlook.

The 2-year yield had its biggest monthly decline since March 2020. U.S. financial markets were closed Monday because of the holiday.

What Treasury yields are doing
  • The yield on the 2-year Treasury BX:TMUBMUSD02Y rose 4.2 basis points to 2.540% from 2.498% Friday afternoon. In May, it declined 15.6 basis points, ending a nine-month streak of gains. That was the largest one-month decline since March 2020, based on 3 p.m. levels, according to Dow Jones Market Data.
  • The yield on the 10-year Treasury TMUBMUSD10Y, 2.853% advanced 9.4 basis points to 2.842% from 2.748% late Friday. For the month, it fell 4.3 basis points, snapping a five-month streak of gains. That was its largest one-month yield decline since November.
  • The yield on the 30-year Treasury TMUBMUSD30Y, 3.051% rose 7.9 basis points to 3.056% from 2.977% on Friday. The rate rose 11.1 basis points for the month.
What’s driving the market

Tuesday’s rise in U.S. yields came after Federal Reserve Gov. Christopher Waller said in a speech in Frankfurt, Germany, on Monday that he supports lifting interest rates by half percentage point increments for several meetings until he sees signs that inflation is coming down.

His comments led to diminished hopes by investors for either a pause in rate hikes or a 25 basis point hike in September. The remarks came just as the Fed is set to kick off the process of reducing its almost $9 trillion balance sheet.

Read: Fed’s quantitative tightening is about to arrive: What that might mean for markets

“In particular, I am not taking 50 basis-point hikes off the table until I see inflation coming down closer to our 2% target,” Waller said. “And, by the end of this year, I support having the policy rate at a level above neutral so that it is reducing demand for products and labor, bringing it more in line with supply and thus helping rein in inflation.”

Data released on Tuesday showed that home prices increased more than 20% in 20 cities nationally on a year-over-year basis during March, according to an S&P CoreLogic Case-Shiller index. The Chicago PMI, a barometer of business conditions in the Chicago area, rose to 60.3 in May from 56.4 in the prior month. Meanwhile, a U.S. consumer-confidence reading fell to a three-month low of 106.4 in May from 108.6 in April.

What analysts are saying

Some of the optimism that the Fed may slow its removal of monetary accommodation later this year, after front loading rate hikes in June and July, “has faded following hawkish comments from Governor Waller, which has gotten the week started for risk sentiment on a somewhat dour note,” said strategists Daniel Krieter and Daniel Belton at BMO Capital Markets.

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