A slightly lower-than-expected rate of inflation last month shows that the Federal Reserve's rapid interest rate hikes are yielding results. Treasury yields stabilized amid growing bets on a Fed pause after the 10th-straight month of headline inflation declines. With signs of slower economic growth and the banking sector turmoil, it would be surprising if the central bank opts for an eleventh-rate hike in June, even if the U.S. created more jobs than expected in April. Fed funds futures contracts are even pricing in a first rate cut in Q4 2023 and now see the year-end rate near 4.50%. Meanwhile, credit-default swaps on Treasuries were on the rise, suggesting that worries about a U.S. default are growing if no agreement can be reached on the debt ceiling in the coming weeks.
Against this backdrop, the 10-year Treasury yield hovered around 3.47% while the yield on the 30-year Treasury note was flirting around 3.79%. U.S. bond ETFs continued to witness large inflows: $7.8 billion for the week, twice higher than inflows in equity ETFs, and almost $78 billion since the beginning of the year (2.5x inflows in equity ETFs).
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