AI Boom and Debt Woes

Tech boom, economic data send rates soaring higher. Swap rates and Treasury yields rose across a flattening curve today, the move spurred by an AI-fueled tech boom and economic data beats. The risk-on mood was led by Nvidia Corp. after the company reported stronger than expected earnings and an upbeat forecast for the rest of the year which sent tech shares higher, the NASDAQ Composite rising 1.71%. The 2-year yield rose ~16bps to 4.53%, continuing a sharp sell-off of ~52bps since the month’s open. Also contributing to the sentiment were beats in Chicago manufacturing, GDP, and core PCE (QoQ). Futures markets are now pricing in nearly a 100% chance of a 25bp hike by the end of the July FOMC meeting.

US Treasury cash balances fall below $50 billion. As the debt-ceiling crisis continues to develop, the amount of money the US government has available to pay its bills has fallen to the lowest level since 2021, raising the risk of default by early June if the debt limit isn’t raised or suspended before then. The steep decline from $140 billion in available funds on May 12th is largely due to the accounting measures underway to avoid a default. The tensions prompted Fitch to put its AAA US credit rating under watch today, with the agency stating that a downgrade would be driven by increased political partisanship preventing a resolution. DBRS Morningstar also followed suit. Treasury Secretary Yellen said yesterday that signs of market stress related to the debt ceiling are emerging; for example, yields on T-Bills due the first day of June surged past 7% yesterday. Still, she stated that the administration is focused on a debt-deal rather than preparing for a default. Broadly, market participants still expect a deal to be reached given the dramatic impacts of an unprecedented U.S. default.

Day ahead. PCE, personal income, personal spending, and durable goods figures will be released at 8:30 AM. Michigan consumer sentiment will follow at 10 AM before an early market close at 2 PM.

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