Yields Surge Temporarily After US Credit Downgrade

US credit downgrade fuels a brief Treasury sell-off. The yield curve bear steepened this morning after Moody’s downgraded the United States’ credit rating from Aaa to Aa1 due to concerns about government debt levels. 10-year and 30-year yields climbed as high as 4.56% and 5.03%, respectively, ~9 bps above opening levels. However, yields reversed course throughout the remainder of the session and closed 1-4 bps lower across the curve. Equities also climbed substantially from morning lows, with the S&P 500 closing in the green after opening 1% lower.

Two Fed officials hint at delayed rate cut timeline. After last week’s University of Michigan inflation expectation data hit multi-decade highs, Fed President Bostic stated today that he worries “a lot about the inflation side” of the Fed’s mandate. He also noted that the Fed should “let things sort out” due to uncertainty that could become prolonged if ongoing US trade negotiations progress slowly. Meanwhile, NY Fed President John Williams argued today that “It’s not going to be that in June we’re going to understand what’s happening here, or in July… It’s going to be a process of collecting data, getting a better picture, and watching things as they develop.” Fed Funds futures now have a 25 bp rate cut priced in as 9% likely in June, 35% likely by the end of July, and 93% probable by September’s meeting.

Chinese industrial production expands while consumption falls. China’s economic challenges remain, with weaker consumer spending coming alongside rosier industrial production data. Per Chinese government data, industrial output rose 6.1%, exceeding estimates, which was cheered as a sign that the country avoided the worst impacts of tariffs. On the other hand, retail sales growth fell from 5.9% in March to 5.1% in April, lower than expected, and highlighted the need for continued government support if China wishes to reach its 5% GDP growth target this year. The property sector, which weighed on Chinese economic performance last year, continues to lag, with the latest government data showing a ~10% monthly decline in real estate investment in April, and unemployment remains elevated vs. pre-2018 levels.