Bond vigilantes on alert

Could this be a return of the bond vigilantes? Last week, the 30-year Treasury yield momentarily breached the 5% level, its highest since October 2023. The recent US credit rating downgrade by Moody’s, along with the ongoing policy debates in Washington and growing fiscal deficit fears seem to be giving the Treasury market some indigestion.

In an otherwise quiet week, several Federal Reserve officials held public appearances, collectively emphasizing the ability to remain patient and assess incoming data before making a policy decision from here. Cleveland Fed President Beth Hammack summed it up best with “the best action we can take is to sit on our hands and really carefully go through the data.” Other comments were focused on tariffs;  officials still expect the levies could dampen economic growth and lead to some softening of the labor market. None of this was breaking news, the Fed has held rates stable so far this year, and despite some bumpy expectations, it appears in no rush to move.

The incoming data continues to support an economy that is chugging along. Initial jobless claims of 227,000 came in slightly better than expected, as did the May Purchasing Managers Index (PMI) of 52.1, which remained in expansion territory. The one negative mark last week was April existing home sales, which fell short of expectations and represented the lowest month of April since 2009. It’s too early to tell if this is a symptom of poor consumer sentiment, elevated interest rates, or something else. Unfortunately, A Fed on pause and rising long-term interest rates will not provide much relief, or perhaps incentive, for mortgage borrowers.