- Yields on long-term U.S. Treasury bonds have risen significantly, with the benchmark 10-year Treasury yield climbing 49 basis points from 3.94% at the end of February to 4.43%. The two-year Treasury yield has also risen to 3.94%, reflecting the market's repricing of the Federal Reserve's longer-term high interest rates.
- The labor market has shown unexpected resilience, with 178,000 new jobs added in March, nearly three times the market estimate of 60,000, and the unemployment rate slightly decreased to 4.3%, undermining the macroeconomic basis for implementing an accommodative monetary policy in the short term.
- The inflation pathway is supported by geopolitical premiums and structural demand, with the federal funds rate currently maintained in the 3.50%-3.75% range. The marginal changes in policy focus will heavily depend on the soon-to-be-released May nonfarm employment report and the continuous trend in unemployment rates.
Marginal Reconfiguration of Interest Rate Pricing
The U.S. fixed income market is undergoing a profound restructuring of expectations. Before the outbreak of the recent Middle East geopolitical conflict, federal funds rate futures traders had priced in two 25 basis-point rate cuts in 2026. However, due to the continued resilience of macroeconomic data and inflation expectations driven by rising energy prices, this accommodative pricing has been spontaneously revised by the market. The yield on the most interest rate-sensitive two-year Treasury (US2YT=RR) has risen from 3.38% to 3.94%, a 56 basis-point increase, essentially the market accepting the Federal Reserve's (Fed) maintenance of the current 3.50%-3.75% baseline rate range. In the short term, without significant macroeconomic shocks, the interest rate center is expected to remain in a high level oscillation.
Resilience Test of Employment Data
The supply-demand balance of the labor market has become a core variable in determining the trajectory of monetary policy. According to data previously released by the U.S. Department of Labor (DOL), 178,000 new jobs were added in March, significantly exceeding economists' expectations of 60,000 surveyed by Reuters. This unexpected momentum indicates that corporate demand for labor remains robust even in a tight financial environment. The market is currently highly focused on the May nonfarm employment report, due this Friday, with current expectations for 62,000 new jobs and an unemployment rate steady at 4.3%. If the data further confirms the robustness of the employment market, the probability of the Fed abandoning its accommodative inclination will increase significantly.
Internal Policy Divergence and Forward Guidance
There are signs of division within the Federal Reserve (Fed) when assessing the current economic situation and policy path. In the most recent monetary policy meeting, although rates were kept unchanged overall, three policymakers expressed opposition to language hinting at rate cuts. Analysis by BMO Capital Markets suggests that support for a neutral rate path is growing internally. Additionally, the policy committee may formally adjust its forward guidance at the meeting on June 16-17. This marginal convergence in policy stance means the threshold for lowering the federal funds rate target is realistically increasing.
Energy Premium and Inflation Stickiness
Beyond the core labor market, energy input-driven inflation forms another dimension of policy consideration. Although the market expects cooling geopolitical conflict might guide oil prices back to normalcy, the underlying logic of inflation showed sticky characteristics even before the conflict. Manulife Investment Management points out that the recent extraordinarily large wave of tax rebates has partially masked the squeezing effect of high energy costs on end consumers. If this funding buffer period ends, the transmission effect of high oil prices to core consumption data will gradually become apparent. Consequently, the mere dissipation of geopolitical risk is insufficient to constitute a sufficient condition for rate cuts; a systematic decline in inflation indicators still requires longer-term observation.
