May was another volatile month in the rates markets, although nowhere near what was experienced by the equity markets. The Federal Reserve increased the fed funds rate by 50 basis points (bps) early in the month and made clear that additional hikes of that magnitude would be forthcoming along with a reduction in the size of the Fed’s balance sheet. This month’s inflation prints offered no relief, generally coming in higher than expected.
Commodity prices, Ukraine, and COVID restrictions in China all complicate market prognostications. Quarterly earnings reports were mixed. Consumers appear to be dipping into savings, but jobs are plentiful and future labor costs remain a concern. Overseas, inflation and energy insecurity dominate market concerns.
The benchmark 10-year U.S. Treasury note yield rose to 3.12% early in the month, a level not seen since late 2018. However, as the Fed made clear its desire to tame inflation, the yield fell to a low of 2.74%, but it continues to trade with elevated daily volatility. The closely watched shape of the 2–10-year yield curve steepened by a handful of basis points to +27.
The market’s view of the Fed’s terminal funds rate has shifted frequently. At month-end the Fed Funds futures market is pricing in a rate of approximately 2.85% by February 2023.