Treasury Yields Climb Higher as Traders See First Fed Cut Later

Treasury yields surged following data indicating robust US business activity and a tight labor market, prompting traders to delay expectations for Federal Reserve interest-rate cuts until the end of this year.

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The two-year yield, which is sensitive to Fed policy, increased by more than 8 basis points, reaching 4.95%, its highest since May 2. Yields across other maturities also rose by at least 5 basis points, leading to a flatter yield curve. Trading volume was below average ahead of the long Memorial Day weekend, with US markets set to close on Monday.

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On Thursday, data revealed that US business activity accelerated in early May at the fastest pace in two years. This followed a report showing that initial applications for US unemployment benefits decreased last week.

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"The short end is fearful of the Fed," said Andrew Brenner, head of international fixed income at NatAlliance Securities LLC.

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Overnight index swaps contracts tied to upcoming Fed policy meetings now fully price in a quarter-point rate increase in December, compared to November a day earlier. For 2024, the contracts suggest a total of 33 basis points of rate cuts, down from around 39 basis points as of Wednesday's close.

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Additional pressure on Treasuries arose after Wednesday's selling, which followed the release of minutes from the Fed's latest policy meeting. These minutes revealed that "many" officials questioned whether the current policy was restrictive enough to bring inflation down to the target level.

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