Volatility in interest markets was modest throughout May. The U.S. Treasury benchmark 10-year note traded within a 15-basis point (bp) range, ending the month just 4 bps lower. Paper up and down the curve traded likewise, but short Treasuries barely moved. 

The lack of market movement occurred despite several economic releases that were significantly different than market expectations, such as a payroll number early in the month that came in well below estimates. In addition, inflation and related indicators appeared to spike on the high side, with monthly core CPI up close to 1%, wages rising, and inflation expectations jumping.

Inflation generated a considerable amount of discussion in May, along with the Federal Reserve’s likely response. There is broad consensus with the Fed that recent spikes in inflation may continue for some time, but that inflation will ultimately be “transitory” and will return to recent pre-pandemic levels. Longer maturity TIPS break-evens hit new highs mid-month before dropping back by month end. Next up for the Fed and the market: when does tapering of Federal Reserve asset purchases begin?

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