5/31/24 - Treasury Yields Volatile Amid Uncertain Monetary Policy: Analysis & Market Insights

Treasury yields remain volatile as market participants’ view on the trajectory of monetary policy remains fluid and bearish coupled with elevated supply from the US Treasury to fund the deficit. The US Treasury auctioned $69 billion two-year notes and $70 billion of five-year notes on Tuesday, May 28^th, followed by $44 billion of seven-year notes on Wednesday, May 29^th. Notably, the current size of the respective securities is materially higher in the two-year and five-year notes than the December 2023 auction sizes of $60 billion two-year notes, $61 billion five-year notes, and less onerous 42 billion seven-year notes. All three of the coupon note auctions cleared the market with a ‘tail’ this week, with the yield level at issuance higher than the market yield level at the time of the auction, a bearish indicator for Treasury demand. Regarding week-over-week interest rate volatility and using the five- year treasury note as a market proxy, the five-year Treasury traded in an interest rate range of 18 basis points during the week, with a high yield of 4.67% and a low yield of 4.49%.

Economic data released this week were mixed overall but indicate some signs of slowing momentum in the US economy. The price appreciation in the US housing market remains intact, with the S&P Core Logic 20 City House price index appreciating by 7.38% on a year-over-year basis as of March 2024 (the data release is lagged). The supply/demand imbalance in the housing market is forecasted to remain and the incentive for existing homeowners with low mortgage rates to ‘trade up’ is low in the current high mortgage rate environment, negatively impacting existing home sale supply and thus supportive of price appreciation. Consumer Confidence improved on a month-over-month basis to 102.0 compared to the prior reading of 97.5, with the recent trend in the number marginally above the psychologically important 100 level. The second estimate of first quarter GDP was revised down by 0.3% to 1.3%, with the downward revision linked to softer consumer spending, somewhat offset by solid services demand. The fiscal impulse from policies enacted in 2023, notably the Inflation Reduction Act, will diminish in 2024, slowing the trajectory of the growth rate of the US economy and arguably allowing restrictive monetary policy to be more effective in the Chandler team’s view.

The most important economic data this week was the PCE inflation data released this morning. The PCE Deflator came in a 0.3% month-over-month and 2.7% year-over-year, while the PCE Core Deflator came in at 0.2% month-over-month and 2.8% year-over-year. Notably the PCE Core number was very close to rounding up to 0.3% on a month-over-month basis, supporting the ‘sticky’ inflation narrative. The strong disinflation impulse in the second half of 2023 reversed in the first quarter of 2024, but the Chandler team expects economic headwinds to grow in the second half of the year, helping to further moderate the trend in inflation. We still believe the Federal Reserve’s underlying objective is to attempt to deliver a soft landing for the US economy, with GDP growth below potential but positive, and the unemployment rate moving marginally higher but not to an onerous level. In our view a soft-landing objective is consistent with a moderate adjustment lower in the Federal Funds rate in coming months; we continue to expect the pace and magnitude of the monetary adjustment to be measured and moderate, absent an exogenous shock to the economy.

Next Week:

ISM Manufacturing and Services, JOLTS, ADP Employment, Nonfarm Productivity, Unit Labor Costs, Jobless Claims, Employment, and Consumer Credit.

© 2024 Chandler Asset Management, Inc. An Independent Registered Investment Adviser. All rights reserved. Data source: Bloomberg, Federal Reserve, and the US Department of Labor. This report is provided for informational purposes only and should not be construed as specific investment or legal advice. The information contained herein was obtained from sources believed to be reliable as of the date of publication, but may become outdated or superseded at any time without notice. Any opinions or views expressed are based on current market conditions and are subject to change. This report may contain forecasts and forward-looking statements which are inherently limited and should not be relied upon as an indicator of future results. Past performance is not indicative of future results. This report is not intended to constitute an offer, solicitation, recommendation, or advice regarding any securities or investment strategy and should not be regarded by recipients as a substitute for the exercise of their own judgment. Fixed income investments are subject to interest rate, credit, and market risk. Interest rate risk: The value of fixed income investments will decline as interest rates rise. Credit risk: the possibility that the borrower may not be able to repay interest and principal. Low-rated bonds generally have to pay higher interest rates to attract investors willing to take on greater risk. Market risk: the bond market, in general, could decline due to economic conditions, especially during periods of rising interest rates. The S&P Corelogic Case-Shiller home price index tracks monthly changes in the value of residential real estate in 20 metropolitan regions across the nation.