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U.S. Treasury yields are showing signs of rebounding again, as markets judged that the Federal Reserve has moved a step closer to raising its benchmark rate after the Middle East war pushed up inflation while employment held steady.
In the global bond market on June 3 (local time), the yield on the 10-year U.S. Treasury note traded at 4.49%, up 0.03 percentage point from the previous session, while the 30-year Treasury bond traded at 4.99%, up 0.02 percentage point. Intraday, the 10-year and 30-year yields briefly topped the psychological resistance lines of 4.5% and 5.0%, respectively. Given that the 10-year and 30-year yields had stayed below 4.5% and 5.0% since their last closes on May 22 and 27, anxiety is once again spreading at the market's base. The 10-year U.S. Treasury is the benchmark for the global bond market, while the 30-year is the reference for U.S. mortgages and high-grade corporate bonds.
U.S. Treasury yields are wavering like this because the United States and Iran are experiencing armed clashes without having concluded a war-ending negotiation. With the Middle East situation falling into deadlock, Brent crude futures and U.S. West Texas Intermediate (WTI) crude futures rose for three consecutive trading sessions from June 1 to 3, further fueling inflation. That day, the U.S. Energy Information Administration (EIA) announced that as of May 29, U.S. commercial crude inventories stood at 433.7 million barrels, down 8 million barrels from a week earlier.
On top of this, relatively solid employment data poured cold water on the possibility of a Federal Reserve rate cut this year. U.S. employment data firm Automatic Data Processing (ADP) said private employment rose by 122,000 last month from April. That exceeded the market forecast of 117,000.
The Fed, too, in its June Beige Book economic conditions report released that day, viewed inflation pressure as a bigger problem than a crisis in the labor market. The Fed explained that "rising energy costs from the Middle East conflict are spreading inflationary pressure into shipping, packaging, food, and fertilizer sectors," adding that "in employment, a 'low-hiring, low-firing' trend continued in most regions, while hiring in the manufacturing sector stood out." In related news, the U.S. Department of Labor announced that new jobless claims last week (May 24–30) totaled 225,000, up 13,000 from a week earlier. That was the highest number of claims in four months since the first week of February (230,000) and exceeded the experts' forecast compiled by Dow Jones (215,000).
According to the Chicago Mercantile Exchange (CME) FedWatch, the federal funds rate futures market that day raised the probability that the Fed will raise rates within this year to 58.0% from 54.0% the previous day. By contrast, the probability of keeping rates frozen at the current level fell to 41.3% from 44.9%, and the probability of a cut fell to 0.6% from 1.1%.
