Bond Report: Treasury yields end at highest since March as door opens to a June Fed rate hike

What happened

• The yield on the 2-year Treasury
  TMUBMUSD02Y,
  4.279%
  rose 11.3 basis points to 4.269% from 4.156% on Wednesday. The yield is up 37 basis points over the last six trading days, matching the six-day streak of advances seen in the period that ended on Sept. 26.

• The yield on the 10-year Treasury
  TMUBMUSD10Y,
  3.654%
  rose 6.7 basis points to 3.647% from 3.580% as of late Wednesday. The yield is up 25.1 basis points over the last five trading days, its longest streak of advances since the period that ended on June 14, 2022.

• The yield on the 30-year Treasury
  TMUBMUSD30Y,
  3.909%
  rose 2.3 basis points to 3.901% from 3.878% Wednesday afternoon. The yield is up 15.4 basis points over the last five trading days.

• Thursday’s levels are the highest for the 2- and 10-year rates since March 10, and the highest for the 30-year rate since March 6, based on 3 p.m. figures from Dow Jones Market Data.

What drove markets

In a prepared speech to bankers in Texas, Dallas Fed President Lorie Logan said that “after raising the target range for the federal funds rate at each of the last 10 FOMC meetings, we have made some progress.”

Data in coming weeks “could yet show that it is appropriate to skip a meeting. As of today, though, we aren’t there yet,” said Logan, a voting member this year of the rate-setting Federal Open Market Committee.

Logan’s colleague, St. Louis Fed President James Bullard, also weighed in on Thursday, saying he’s inclined to back another rate hike as an “insurance” policy against inflation, even while keeping an “open mind” going into the FOMC’s June 13-14 meeting. Bullard is a non-voter on the FOMC in 2023.

After the pair of remarks, markets priced in a 35.6% probability that the Fed will hike interest rates by a quarter-of-a-percentage point to between 5.25% and 5.5% on June 14, according to the CME FedWatch Tool. Fed funds futures traders also saw a 33% likelihood that the fed funds rate target would stay in that range in July.

U.S. economic data released on Thursday showed that weekly initial jobless claims sank to 242,000 in mid-May from 264,000 in the prior week, but the Philadelphia Fed’s gauge of regional business activity had its ninth straight negative reading last month. Meanwhile, existing home sales fell 3.4% in April to an annual rate of 4.28 million and the Conference Board’s U.S. leading economic index dropped 0.6% last month, extending its streak of declines.

Easing anxiety about the U.S. regional banking sector was seen as curtailing flows into perceived havens, such as government bonds, with investors reasoning that calmer conditions in the financial sector should allowed the Federal Reserve to keep interest rates high for longer.

What strategists are saying

“The latest Fedspeak has left the door open to a possible hike in June while pushing back against cuts in 2023; such hawkish resolve is bearish for inflation protection,” said BMO Capital Markets strategists Ben Jeffery and Ian Lyngen.

“Additionally, investors may be hesitant to add real rate exposure before Powell speaks on Friday and likely reiterates his commitment to restoring price stability at all costs,” they wrote in a note.