Bond Report: Treasury yields higher as market cements 25 basis point hike by Fed in May

Markets are pricing in an 88.2% probability that the Fed will raise interest rates by another 25 basis points to a range of 5.0% to 5.25% after its meeting on May 3rd, according to the CME FedWatch tool.

The central bank is expected to take its Fed funds rate target back down to 4.6% by December, according to 30-day Fed Funds futures.

As investors have become less uncertain about the trajectory of Fed tightening, so traders have become less concerned about the chances of sharp vacillations in bonds.

The BoAML MOVE index, which measures expected volatility in Treasuries, is trading around 120, having plunged from near 200 in mid March.

U.S. economic updates set for release on Monday include the Empire State manufacturing index for April, due at 8:30 a.m. Eastern, and the April homebuilder confidence index at 10 a.m. Richmond Fed President Tom Barkin is due to make comments at 12:45 p.m.

What are analysts saying

“Despite the softer-than-expected inflation data released earlier last week, U.S. inflation expectations shocked investors at last Friday’s release; the 1-year expectation jumped from 3.6% to 4.6% due to the surprise surge in energy prices. The expectation was a further easing to 3.5%,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.

“Combined to waning bank stress, the U.S. 2-year yield – which is a good proxy of what investors think the Fed will do – rose last week, although we are still far below the 5% level before the Silicon Valley Bank collapsed,” she added.