30-year Treasury yield finishes at highest since March on higher-for-longer theme in interest rates

What happened

• The yield on the 2-year Treasury
  TMUBMUSD02Y,
  4.071%
  rose 6.8 basis points to 4.072% from 4.004% on Monday. The yield is up 17.3 basis points over the last four trading sessions, according to 3 p.m. figures from Dow Jones Market Data.

• The yield on the 10-year Treasury
  TMUBMUSD10Y,
  3.542%
  advanced 4.2 basis points to 3.548% from 3.506% as of Monday. That’s the highest level since May 1. The yield is up six of the past eight trading days.

• The yield on the 30-year Treasury
  TMUBMUSD30Y,
  3.861%
  rose 3 basis points to 3.871% from 3.841% late Monday. That’s the highest level since March 8. The 30-year yield is up seven of the past nine trading sessions.

What drove markets

Data released on Tuesday showed that U.S. retail sales rebounded 0.4% in April largely because of strong demand for new autos and higher consumer spending online, pointing to a steady economy. Sales had been forecast to rise 0.8%, based on a Wall Street Journal poll of economists.

Meanwhile, industrial production was up 0.5% in April after two flat months. And residential-builder sentiment improved for the fifth month in a row during May amid an ongoing shortage of U.S. home sales.

Taken together, Tuesday’s data contributed to an emerging, non-basecase narrative in markets that the U.S. economy may be more resistant to a recession than many people thought.

Read: ‘Survival of the strongest’: How pandemic-era shifts may upend market’s recession narrative

With more debt-ceiling talks set for Tuesday, investors were struggling to gauge the likelihood of a technical default by the U.S. government and what impact it may have on the debt markets and central bank policy. Treasury Secretary Janet Yellen issued a fresh warning on Tuesday, saying the economy “hangs in the balance” without a debt-ceiling increase.

Read: Debt-ceiling deal not expected yet as Biden meets again with McCarthy and other lawmakers and Fed’s Barkin says he’s tracking data and will decide later on June interest rate pause or hike

As of Tuesday, markets were pricing in an 83.2% probability that the Fed will leave interest rates unchanged at a range of 5% to 5.25% on June 14, according to the CME FedWatch tool. The central bank is also mostly expected to leave its fed funds rate target between the same range in July, according to 30-day Fed Funds futures.

Data released Tuesday from China showed the world’s second biggest economy was not rebounding from its Covid slowdown as strongly as hoped. China’s industrial production rose 5.6% in April from a year earlier, below forecasts. Retail sales grew 18.4% from a year earlier, but also missed expectations.

What analysts are saying

“There is nothing in this [U.S. retail sales] series that will take a June rate hike off the table — although we are doubtful one comes to fruition,” BMO Capital Markets rates strategist Ian Lyngen said in a note. “Instead, the Fed will err on the side of retaining terminal for as long as possible as economic headwinds continue to mount but remain contained for the time being.”