U.S. two-year and 10-year yields climbed to two-week peaks in the wake of the robust manufacturing data.
“More and more people are starting to question the Fed’s rate outlook of three cuts because U.S. data has been strong,” said Stan Shipley, fixed income strategist, at Evercore ISI in New York.
“Growth has been in the twos, inflation has been in the threes. That’s not what the Fed wants. I would say unless we see some weak data pretty soon here, people will start to question the June cut too,” he added.
The U.S. rate futures market has priced in a 57% chance of a rate cut in June, down from about 64% a week ago, according to the CME’s FedWatch tool.
The market has also pared back the number of rate cuts to about two this year, from three a few weeks ago, according to LSEG’s rate probability app. Data on Monday showed U.S. manufacturing grew for the first time in 1-1/2 years in March as production rebounded sharply and new orders increased, but employment at factories remained subdued and prices for inputs pushed higher. The Institute for Supply Management’s (ISM) manufacturing PMI increased to 50.3 last month, the highest and first reading above 50 since September 2022, from 47.8 in February.
“Although the manufacturing contraction finally ended last month, the recovery is expected to remain weak and uneven until the Fed starts to loosen monetary policy around mid-year,” said Jay Hawkins, senior economist, at BMO.
Data also showed that inflation at the factory gate picked up. The survey’s measure of prices paid by manufacturers rose to 55.8 from 52.5 in February.
In late morning trading, the benchmark U.S. 10-year yield rose as high as 4.325%, its strongest level since March 19. It was last up 12.5 basis points (bps) at 4.319%.
U.S. 30-year bond yields advanced 11.4 bps to 4.451% .
On the shorter-end of the curve, U.S. two-year yields, which track rate move expectations, were up 9.6 bps at 4.715% . Earlier in the session, two-year yields hit 4.72%, a roughly two-week high.
The U.S. yield curve, meanwhile, steepened on Monday, or narrowed its inversion, with the closely-watched spread between 10-year and two-year U.S. Treasury yields at minus 39.5 bps , up from minus 42.4 bps late on Thursday.
A typical predictor of recessions, the U.S. yield curve has been inverted since July 2022.
