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