U.S. Treasury yields declined for the last week of April as traders digested key economic data that may have an impact on the Fed’s policy decision in early May. Wages and salaries for private-sector U.S. workers continued to grow in the first quarter, up 1.2% from December 2022, the Labor Department said Friday. Furthermore, the real gross domestic product (GDP) increased at an annual rate of 1.1% in the first quarter of 2023, according to the "advance" estimate released by the Bureau of Economic Analysis. It had increased 2.6% in the fourth quarter.
Against this backdrop, the Federal Reserve is expected to hike interest rates by a further 25 basis points at the conclusion of its two-day policy meeting on Wednesday, May 3. It would be the tenth rise in a row that would put the benchmark Fed funds target in a range between 5.00% and 5.25%. A growing number of economists think it’s above the real neutral rate of interest that equilibrates the economy in the long run (a.k.a. ‘R-star’). If this happens, let’s hope it will be the peak for the current round of policy tightening before pivoting to monetary easing at the end of the year.
The U.S. 10-year Treasury yield was down 15 basis points week-over-week to 3.42% from 3.57%. The yield on the 2-year Treasury closed at 4% after falling by nearly 18 basis points. Fed funds futures contracts are still pricing in a first-rate cut in Q4 2023 and now see the year-end rate just below 4.50%. Moreover, the Federal Reserve reduced the amount of assets it holds by $31 billion last week, bringing the size of its balance sheet to $8.563 billion as of 26 April. As a result, it pulled $143 billion out of the financial system in April. This can be compared with the $366 billion added to its balance sheet in March.
In Europe, the yield on the German 10-year Bund lost 17 basis points over the week to 2.31% from 2.48%, while the yield on the French 10-year OAT closed 15 basis points lower to 2.90% from 3.05%. Fitch Ratings has downgraded France's long-term foreign-currency Issuer Default Rating (IDR) to 'AA-' from 'AA' with a “stable outlook.” Yet, this decision did not have any major impact on the France 10-year / Germany 10-year Government bond spread value (now closer to 60 basis points).
Investment grade corporate bond prices were up 0.76% in Europe (IBOXX € Liquid Corporates index) and up 0.95% in the U.S. (IBOXX Ishares $ Investment Grade Corporate Bond Index).
High-yield bonds were trading water in Europe (+0.01% for the IBOXX € Liquid High Yield Index) but gained 0.48% in the U.S. (Markit iBoxx USD Liquid High Yield Capped Index).
Emerging debt in local currencies was up 0.46% while the dollar index fell below 101.45.