Bond Market Update

Hard Selling Awakens Rate Hike Speculation

• U.S. Treasuries had a poor finish to a week that saw yields soar to fresh highs for the year amid renewed upward pressure on the price of oil. Treasuries showed some resilience on Thursday, pressuring yields from their highest closing levels of the year, but that became a distant memory by Friday morning. The entire complex started the day on a sharply lower note and stayed pressured into the close with yields hitting new highs for 2026. The selling in Treasuries was accompanied by profit taking in equities after their record run, as the market grew more concerned about a potential resumption of military action against Iran. This was reflected in rising energy prices with WTI crude pushing past $105/bbl to gain $10/bbl for the week. The understanding that persistently high energy prices will continue presenting a tailwind to inflation has led the market to consider the possibility that the next rate change from the FOMC will be a hike rather than a cut. The fed funds futures market now sees a roughly 60-40 chance of a hike in January. On a related note, Kevin Warsh began his term as Fed Chairman today. Crude oil settled at a ten-day high while the U.S. Dollar Index rose 0.5% to 99.28. The Index reclaimed its 50-day moving average (98.99), gaining 1.5% for the week.
• Yield Check:
  • 2-yr: +9 bps to 4.08% (+19 bps this week)
  • 3-yr: +12 bps to 4.15% (+23 bps this week)
  • 5-yr: +14 bps to 4.26% (+25 bps this week)
  • 10-yr: +13 bps to 4.60% (+24 bps this week)
  • 30-yr: +12 bps to 5.13% (+18 bps this week)

• News:
  • G-7 finance ministers will meet in France this weekend to discuss global bond volatility.
  • U.S. Trade Representative Greer said that discussions about rare-earth materials with China went ok as President Trump wrapped up his visit to Beijing. Some CEOs that accompanied the president stayed behind to continue business discussions.
  • British Prime Minister Starmer may face a leadership challenge from Andy Burnham, who is the mayor of Greater Manchester. However, Mr. Burnham is not in parliament, so he would first need to win a special election to fill a vacant seat created by the resignation of a Labour MP.
  • The European Central Bank's latest economic bulletin acknowledged the increase in energy costs due to the conflict in Iran, noting that households and firms are becoming more reluctant to consume and invest.
  • Japan's April PPI was up 2.3% m/m (expected 0.7%; last 1.0%), rising 4.9% yr/yr (expected 3.0%; last 2.9%). April Machine Tool Orders were up 45.1% yr/yr (expected 28.1%; last 24.2%).
  • South Korea's April Import Prices Index was up 20.2% yr/yr (last 20.4%), jumping 40.8% yr/yr (last 29.5%).
  • Hong Kong's Q1 GDP expanded 2.9% qtr/qtr, as expected (last 1.0%), growing 5.9% yr/yr, as expected (last 3.8%).
  • India's April trade deficit reached $28.38 bln (expected deficit of $27.00 bln; last deficit of $20.67 bln).
  • New Zealand's April Business PMI hit 50.5 (last 52.8) and April Food Price Index was unchanged m/m (last -0.6%).
  • Italy's April CPI was up 1.1% m/m (expected 1.2%; last 0.5%), rising 2.7% yr/yr (expected 2.8%; last 1.7%).
• Today's Data:
  • Industrial production increased 0.7% month-over-month in April (Briefing.com consensus: 0.2%) following an upwardly revised 0.3% decline (from -0.5%) in March. The capacity utilization rate was 76.1% (Briefing.com consensus: 75.7%), up from 75.7% in March. Total industrial production was up 1.4% year-over-year. The capacity utilization rate was 3.3 percentage points below its long-run average.
    • The key takeaway from the report is that it was underpinned by solid manufacturing output that was led by the production of durables. Excluding motor vehicles and parts, manufacturing output was up 0.3% month-over-month.
  • The Empire State Manufacturing Survey rose to 19.6 in May (Briefing.com consensus 6.2) from 11.0 in April.
• Commodities:
  • WTI crude: +4.3% to $105.49/bbl
  • Gold: -2.6% to $4561.80/ozt
  • Copper: -4.7% to $6.30/lb
• Currencies:
  • EUR/USD: -0.4% to 1.1621
  • GBP/USD: -0.6% to 1.3321
  • USD/CNH: +0.5% to 6.8152
  • USD/JPY: +0.3% to 158.70
• The Week Ahead:
  • Monday: May NAHB Housing Market Index (Briefing.com consensus 34; prior 34) at 10:00 ET and March Net Long-Term TIC Flows (prior $58.6 bln) at 16:00 ET
  • Tuesday: April Pending Home Sales (Briefing.com consensus 1.6%; prior 1.5%) at 10:00 ET
  • Wednesday: Weekly MBA Mortgage Index (prior 1.7%) at 7:00 ET; weekly crude oil inventories (prior -4.31 mln) at 10:30 ET; $16 bln 20-yr Treasury bond auction results at 13:00 ET; and April FOMC Minutes at 14:00 ET
  • Thursday: April Housing Starts (Briefing.com consensus 1.420 mln; prior 1.502 mln), Building Permits (Briefing.com consensus 1.380 mln; prior 1.372 mln), weekly Initial Claims (Briefing.com consensus 210,000; prior 211,000), Continuing Claims (prior 1.782 mln), and May Philadelphia Fed survey (Briefing.com consensus 15.5; prior 26.7) at 8:30 ET; and weekly natural gas inventories (prior +85 bcf) at 10:30 ET
  • Friday: Final May University of Michigan Consumer Sentiment (Briefing.com consensus 48.2; prior 48.2) and April Leading Index (Briefing.com consensus -0.3%; prior -0.6%) at 10:00 ET

Selling Continues

• U.S. Treasuries have faced continued pressure since today's cash start with the 5-yr note remaining behind other tenors. The extension of the selling in Treasuries comes as oil rises to a fresh high for the day, nearing $106/bbl. Oil is up nearly $5/bbl today and up $10/bbl for the week as speculation builds about renewed military pressure on Iran. With today's selling, the 2-yr yield is now up 19 basis points for the week while the 10-yr yield is up 22 basis points from last week's settlement. This has shifted the market's rate expectations, with investors now pondering the possibility of a rate hike in January.
• Yield Check:
  • 2-yr: +9 bps to 4.08%
  • 3-yr: +11 bps to 4.14%
  • 5-yr: +13 bps to 4.25%
  • 10-yr: +12 bps to 4.58%
  • 30-yr: +10 bps to 5.11%

Opening Losses Extended

• U.S. Treasuries have extended their early losses with the belly leading the early selling. With today's losses, yields on the 5-yr note and shorter tenors have reached their highest levels since February 2025 while yields on 10s and 30s are back to levels last seen in almost a year. Equities started the day on a lower note, giving back a good chunk of this week's gains, though the market is trying to bounce off early lows. Crude oil, meanwhile, remains near $104/bbl, up about $9/bbl for the week.
• Yield Check:
  • 2-yr: +8 bps to 4.07%
  • 3-yr: +10 bps to 4.13%
  • 5-yr: +11 bps to 4.24%
  • 10-yr: +11 bps to 4.57%
  • 30-yr: +10 bps to 5.12%

Data Recon

• Industrial production increased 0.7% month-over-month in April (Briefing.com consensus: 0.2%) following an upwardly revised 0.3% decline (from -0.5%) in March. The capacity utilization rate was 76.1% (Briefing.com consensus: 75.7%), up from 75.7% in March. Total industrial production was up 1.4% year-over-year. The capacity utilization rate was 3.3 percentage points below its long-run average.
  • The key takeaway from the report is that it was underpinned by solid manufacturing output that was led by the production of durables. Excluding motor vehicles and parts, manufacturing output was up 0.3% month-over-month.
• Yield Check:
  • 2-yr: +8 bps to 4.07%
  • 3-yr: +9 bps to 4.12%
  • 5-yr: +11 bps to 4.23%
  • 10-yr: +11 bps to 4.57%
  • 30-yr: +10 bps to 5.11%

 Treasuries Slide as Oil Climbs

• U.S. Treasuries are on track for a lower start with longer tenors set to pace the early selling after a night that saw general weakness in sovereign debt with South Korea's 10-yr yield rising to a fresh high for the year (+16 bps to 4.25%) amid worries about a potential employee strike at Samsung Electronics, though the employee union indicated willingness to push talks back to early June. JGB yields also reached fresh highs for the year with the 10-yr yield rising to a level not seen in nearly 30 years even though Finance Minister Katayama said that an extra budget will not be needed this year. As for Treasury futures, they retreated steadily through the night, reaching lows about two hours ago. Fittingly, G-7 finance ministers will meet in France this weekend to discuss global bond volatility. On a side note, the fed funds futures market is now entertaining the possibility of a 25-basis point rate hike in January. President Trump is on his way back from China, fueling speculation that the pressure campaign on Iran could resume as soon as he returns to Washington. Crude oil has climbed toward $104/bbl after marking an overnight high near $105/bbl while the U.S. Dollar Index is up 0.3% at 99.16.
• Yield Check:
  • 2-yr: +6 bps to 4.05%
  • 3-yr: +7 bps to 4.10%
  • 5-yr: +8 bps to 4.20%
  • 10-yr: +8 bps to 4.54%
  • 30-yr: +8 bps to 5.09%

• News:
  • Fed Chairman Powell's term ends today.
  • U.S. Trade Representative Greer said that discussions about rare-earth materials with China went ok as President Trump wrapped up his visit to Beijing. Some CEOs that accompanied the president stayed behind to continue business discussions.
  • British Prime Minister Starmer may face a leadership challenge from Andy Burnham, who is the mayor of Greater Manchester. However, Mr. Burnham is not in parliament, so he would first need to win a special election to fill a vacant seat created by the resignation of a Labour MP.
  • The European Central Bank's latest economic bulletin acknowledged the increase in energy costs due to the conflict in Iran, noting that households and firms are becoming more reluctant to consume and invest.
  • Japan's April PPI was up 2.3% m/m (expected 0.7%; last 1.0%), rising 4.9% yr/yr (expected 3.0%; last 2.9%). April Machine Tool Orders were up 45.1% yr/yr (expected 28.1%; last 24.2%).
  • South Korea's April Import Prices Index was up 20.2% yr/yr (last 20.4%), jumping 40.8% yr/yr (last 29.5%).
  • Hong Kong's Q1 GDP expanded 2.9% qtr/qtr, as expected (last 1.0%), growing 5.9% yr/yr, as expected (last 3.8%).
  • India's April trade deficit reached $28.38 bln (expected deficit of $27.00 bln; last deficit of $20.67 bln).
  • New Zealand's April Business PMI hit 50.5 (last 52.8) and April Food Price Index was unchanged m/m (last -0.6%).
  • Italy's April CPI was up 1.1% m/m (expected 1.2%; last 0.5%), rising 2.7% yr/yr (expected 2.8%; last 1.7%).
• Commodities:
  • WTI Crude: +2.9% to $104.12/bbl
  • Gold: -2.7% to $4557.40/ozt
  • Copper: -4.2% to $6.331/lb
• Currencies:
  • EUR/USD: -0.3% to 1.1633
  • GBP/USD: -0.3% to 1.3363
  • USD/CNH: +0.3% to 6.8079
  • USD/JPY: +0.2% to 158.54
• Data out Today:
  • 8:30 ET: May Empire State Manufacturing survey (Briefing.com consensus 6.2; prior 11.0)
  • 9:15 ET: April Industrial Production (Briefing.com consensus 0.2%; prior -0.5%) and Capacity Utilization (Briefing.com consensus 75.7%; prior 75.7%)