Two important psychological levels are being tested in the US Treasury market right now. The 2-year yield is trading just above 4.00% this evening, May 14 (chart). That's 25bps above the current federal funds rate (FFR) range of 3.50%-3.75%. That implies investors believe the Fed may need to raise the FFR by at least 25 bps in the foreseeable future.
The 30-year yield breached 5.00% on May 13, triggered by a $25 billion auction that drew such weak demand that it marked the first time since 2007 that the Treasury has auctioned a 30-year bond with a 5% handle. The 30-year has held above 5.00% since, trading at 5.06% this evening (chart). The 10-year yield is trading just above 4.50%, at 4.51% this evening.
The Bond Vigilantes are sending a clear message to the Fed. Drop the easing bias that was in the April FOMC statement. Don't replace it with a neutral stance, but go straight for a tightening bias. Otherwise, the yield curve might start pricing in another Fed policy mistake, i.e., failing to turn hawkish quickly enough to fight inflationary pressures stemming from the Gulf War.
Today's economic data fueled these bearish sentiments in the fixed-income markets:
