April was another challenging month for financial markets. The Bloomberg U.S. Treasury index returned -3.21% for the period. The yield on the 10-year Treasury rose a remarkable 60 basis points (bps); the 30-year bond finished the month at 2.9%. The slope of the curve shifted frequently, and by month-end the 2-10s slope had gone from flat to 22 bps. Volatility was high.

Inflation, and the Fed’s reaction to it, continues to be the market’s overriding concern. The data tells the story:  the personal consumption price index rose 6.6% (year over year), the quarterly employment cost index rose 1.4%, and consumer spending was up as well. The labor market remains tight. Supply chain problems are again an issue, in part due to Covid restrictions in China. Commodity prices remain high, exacerbated by the war in Ukraine. Quarterly GDP declined, although largely due to temporary and technical factors. It nonetheless is a reminder that future stagflation, although considered unlikely, is a risk.

The market has, as of month end, priced in over 300 bps of fed funds rate increases by mid-2023. A 50 bp move is expected in May, and the possibility of an unusual 75 bp hike looms in June. The TIPS 10 year break-even is at 294 bps.

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