Bond Report: 2-year Treasury yield up after PCE inflation report, heading for a rise for 12th session

What’s happening

• The yield on the 2-year Treasury TMUBMUSD02Y, 4.559% jumped 8.1 basis points to 4.589% from 4.508% on Thursday.
• The yield on the 10-year Treasury TMUBMUSD10Y, 3.802% rose 1.4 basis points to 3.828% from 3.814% late Thursday.
• The yield on the 30-year Treasury TMUBMUSD30Y, 3.967% was 3.995%, little changed from 4.003% Thursday afternoon.

What’s driving markets

Data released on Friday showed inflation as measured by the Fed’s preferred inflation measure, the PCE price index, stuck in the 4%-5% range for April. The yearly increase in prices rose to 4.4% from 4.2% in the prior month, and the narrower core rate edged up to 4.7% from 4.6% over the past 12 months.

Fed funds futures traders boosted the likelihood that the Federal Reserve will lift rates again by another quarter of a percentage point in June, to 58.5% as of Friday morning. That’s up from 51.7% a day ago, and would take the Fed’s main benchmark rate target to between 5.25-5.5%, according to the CME FedWatch Tool. Meanwhile, the likelihood of a pause in July was seen at 50.9%.

In Friday’s other data releases, consumer spending jumped 0.8% in April — the biggest increase in three months — as Americans bought more new cars and drugs and increased outlays on services.

In debt-ceiling developments, President Joe Biden and top congressional Republican Kevin McCarthy were said to be closing in on a deal to raise the government’s $31.4 trillion debt ceiling for two years while capping spending on most items.

What analysts are saying

“Prices rose more than expected this morning, with the 10-year rising above 3.8% for the first time since February,” Peter Essele, head of portfolio management for Commonwealth Financial Network. “The rise in prices puts a June hike back in play, perhaps even greater than a quarter percent hike in a last-ditch effort by the Fed to put out the inflationary fire once and for all.”