Economic data releases were sparse this week but that did not impede the fixed income markets from remaining volatile on a week-over-week basis. The benchmark ten-year Treasury note traded in a 19-basis point range week over week (4.43% to 4.62%) with the peak in yields occurring after the passage of US House of Representative Budget Bill in a narrow 215 to 214 votes. Although there are some provisions in the House version of the bill to mitigate the rate of growth of the US deficit, the US Senate still needs to weigh in, and overall, the US deficit outlook is forecasted to remain onerous.
Last Friday, May 16th, after the market close, Moody’s lowered the US credit rating to Aa1 from AAA primarily related to the fiscal outlook, the last of the three major national recognized statistical rating organizations to downgrade the US debt below the AAA tier. The deteriorating fiscal outlook is one of the catalysts for the Chandler team’s core view that investors will seek additional yield compensation to invest in longer maturity Treasury securities. In our team’s view, the Treasury curve shape will continue to normalize and steepen, with the two-year / ten-year Treasury curve spread moving higher from the current 54 basis points (two-year 3.98%, ten-year 4.52% as of the time of this writing) towards the long-term average of 100 basis points over the course of 2025.
The market will obtain several important economic releases next week, with the survey-based data expected to point to continued consumer anxiety. The Conference Board will release their Consumer Confidence number on Tuesday, May 27th, with the consensus expectation at 87.0, consistent with the April 2025 release but well below the December 2024 reading of 109.5. On Friday, May 30th, the monthly indicators on Personal Income, Personal Spending, and the Personal Consumption Expenditures Index (PCE) inflation readings will be released. The market is forecasting Personal Income to be above Personal Spending as consumers retrench and work to build up the savings rate. The PCE data is forecast to be on the soft side but notably does not yet reflect the impact of tariffs, thus the market is likely to discount the favorable readings for now. Inflation readings are forecasted to move higher for a few months due to the tariff impact, and then revert to trend, which will allow the Federal Reserve to hold policy steady in the short term, absent a material deterioration in the employment backdrop. Although continuing jobless claims are once again elevated at 1,903k, weekly jobless claims remain moderate at 227k. We do believe the elevated level of uncertainty linked to the implications of the tariff policy will continue to weigh on consumer behavior which will ultimately allow monetary policy to be adjusted closer to the neutral rate later in the year.
Next week: Durable Goods, S&P Core Logic Home Price Indices, Consumer Confidence, GDP 1Q second update, Jobless Claims, Personal Income, Personal Consumption, PCE Inflation, and University of Michigan Sentiment.
© 2025 Chandler Asset Management, Inc. An Independent Registered Investment Adviser. All rights reserved. Data source: Bloomberg, Federal Reserve, and the US Department of Labor. This report is provided for informational purposes only and should not be construed as specific investment or legal advice. The information contained herein was obtained from sources believed to be reliable as of the date of publication, but may become outdated or superseded at any time without notice. Any opinions or views expressed are based on current market conditions and are subject to change. This report may contain forecasts and forward-looking statements which are inherently limited and should not be relied upon as an indicator of future results. Past performance is not indicative of future results. This report is not intended to constitute an offer, solicitation, recommendation, or advice regarding any securities or investment strategy and should not be regarded by recipients as a substitute for the exercise of their own judgment. Fixed income investments are subject to interest rate, credit, and market risk. Interest rate risk: The value of fixed income investments will decline as interest rates rise. Credit risk: the possibility that the borrower may not be able to repay interest and principal. Low-rated bonds generally have to pay higher interest rates to attract investors willing to take on greater risk. Market risk: the bond market, in general, could decline due to economic conditions, especially during periods of rising interest rates. The composite economic indexes are the key elements in an analytic system designed to signal peaks and troughs in the business cycle. The indexes are constructed to summarize and reveal common turning points in the economy in a clearer and more convincing manner than any individual component.