Treasury Yields Staring Down 3% Threshold Await CPI for Next Cue

The publication of the May consumer price index report on Friday may help to clarify the picture, with the outcome potentially determining whether the benchmark 10-year Treasury Yields retreats further or retests May’s high by pushing back over the psychologically important 3% threshold. It came close on Friday when the yield jumped as much as 8 basis points to 2.98 percent after the monthly employment data confirmed the economy’s resilience.

Swaps contracts are pricing in certainty that the Fed would raise its target rate by a half-percentage point at its June and July meetings, owing to growing wages and a tight job market. However, there is still no clear consensus on whether policymakers will maintain this pace at the September meeting or make a quarter-point hike, which they may do if they are concerned about pushing the economy into a recession or believe inflation is on the decline.

After the Labor Department announced that US companies hired at a faster-than-expected rate in May, Treasury Yields climbed across the board on Friday. It also revealed that average hourly wages increased by 5.2 percent year over year, down from 5.5 percent in April but still significantly above pre-pandemic levels. The CPI number for May is expected to rise 8.3 percent on an annual basis, mirroring April’s rate and down from as high as 8.5 percent in March.

According to Kathy Jones, chief fixed-income strategist at Charles Schwab & Co., which manages over $7 trillion in assets, such expectations should remain in control as long as the Fed keeps its commitment to keeping the consumer-price rise in check. She predicts half-point raises in June and July before the Fed begins to scale down its rate hikes, while she believes a generally strong CPI data will fuel speculation of a 50-basis-point boost in September.