Evening Brief – 05.23.23
Over the last two weeks, US Treasury yields have been steadily climbing. The most notable movement has been in the six-month T-bill, which reached a 22-year high of 5.38% last Friday and is now only two basis points below that level.
Buyers and sellers at the short end of the curve have recovered from their regional bank panic and are now reading between the lines of recent Fedspeak (Kashkari, Logan, Bullard) and pricing in another rate hike in the coming months – if not in June, then at one of the following meetings.
Since the latest rate hike, the effective federal funds rate (EFFR), which the Fed brackets within its target range of 5.0% to 5.25%, has been at 5.08%. Another 25-basis point increase would bring it to 5.33%, putting the EFFR barely below the current six-month yield.
The six-month yield reflects securities that mature in November, and the debt-ceiling issue has had no major impact on it; nevertheless, the debt-ceiling turmoil, along with the danger that the US would default in June, has thrown the one-month yield into complete disarray.
Looking back, the six-month yield began to decline even before the December 2018 25-basis point rate hike, the final one in that three-year tightening cycle. After reaching a peak of 2.58% on December 4 and 2.54% by the FOMC meeting on December 19, it gradually started to decline in the ensuing months as the Fed maintained its policy rate unchanged.
By early June 2019, when the Fed was signaling rate cuts, the six-month yield fell below the EFFR and started pricing in the first cut, which it had fully priced in by mid-June.
Investors watch what the Fed is doing, and they listen to the short-term guidance the central bank gives through its policy decisions, the press conferences, the FOMC minutes and countless speeches. And by the time the rate hikes or rate cuts take place – unless they’re a surprise – the short-term yields have already mostly or totally priced them in.
Current pricing suggests a Fed “pause” could be very short-lived.