TREASURE – U.S. yields climb to one-week highs, but post monthly declines in May

* US two-year and 10-year yields show sharp monthly declines in May * US 2/10 yield curve steepens * US yields trail Europe as eurozone inflation hits record high * U.S. real estate and industrial activity data show strong results (adds new commentary, U.S. data, price updates) By Gertrude Chavez-Dreyfuss NEW YORK, May 31 (Reuters) – U.S. Treasury yields have rose sharply on Tuesday, with most maturities hitting one-week highs, as investors refocused on inflation risks after eurozone inflation hit a record high this month and after economic data optimists in the United States. Tuesday’s reports on real estate and industrial activity in the Midwest showed generally strong results, putting upward pressure on yields. That said, US yields posted monthly declines in May, due to less favorable economic reports during the month and indications that US inflation may have peaked. The US 2-year yield, which tends to be sensitive to rate expectations, fell 18.4 basis points in May, the biggest monthly decline since March 2020. The benchmark 10-year yield fell 9 .3 basis points, the first monthly decline since November 2021. The rise in yields was led by the belly of the curve, however, with US five- and seven-year bonds gaining more than 10 basis points at one point. US 2- to 30-year yields, with the exception of those on 20-year bonds, all climbed to one-week highs. The yield curve was also steeper, with the spread between US two-year and 10-year yields widening to 29 basis points. “We look to nonfarm payrolls later this week and average hourly earnings as the next data points to show that the labor market is still very hot and wage pressure still elevated,” said Zachary Griffiths, strategist for rates at Wells Fargo Securities in Charlotte, North Carolina. “For us, the market is not pricing in a high enough terminal rate,” he added, referring to where interest rates will peak in this cycle. “So that’s going to continue to push yields higher and flatten the curve.” Eurodollar futures are showing a terminal rate of around 3.2% in the Federal Reserve’s latest tightening plan, which will reach June next year. The rise in yields kicked off in European trading after data showed eurozone inflation accelerated to a record 8.1% in May from 7.4% in April, beating expectations 7.7% as price growth continued to broaden. The push in Treasury yields higher was also driven in part by hawkish comments from Fed Governor Christopher Waller on Monday. Waller said he advocated keeping 50 basis point rate hikes on the table until substantial reductions are seen in inflation. In afternoon trading, benchmark US 10-year yields gained nearly 10 basis points to 2.8477%. Treasury yields also rose after strong US housing data. A report showed that the S&P CoreLogic Case-Shiller 20 metro area home price index jumped a record 21.2% on an annual basis in March. Strong house price inflation was also bolstered by another Federal Housing Finance Agency report showing house prices rose 19% in the 12 months to March. US consumer confidence, however, slipped in May, but April was revised higher. Overall, the May reading remained above pandemic lows. US 30-year yields rose 8 basis points to 3.0558%. On the front of the curve, US two-year yields rose 4.8 basis points to 2.5464%. The data also showed manufacturing activity in the US Midwest came in at a stronger than expected 60.3 in May from 56.4 in April, based on the Chicago Purchasing Management Index. It also helped push up yields. The May index was stronger than the consensus of 55.0. “Other regional surveys for May suggest, on the net, a slight slowdown in the ISM manufacturing index,” Rubeela Farooqi, chief U.S. economist at High Frequency Economics, said in a report after the data was released. “Overall, although survey data signals some moderation, manufacturing output continues to grow despite supply network dislocations and shortages.” May 31 Tuesday 3:10 p.m. New York / 1910 GMT Price Current Net Yield % Change (bps) Three-Month Bill 1.05 1.0672 -0.021 Six-Month Bill 1.535 1.5682 0.056 Two-Year Bill 99-233/256 2 .5464 0.048 Three-year bond 100-24/256 2.7165 0.059 5-year bond 99-32/256 2.8139 0.078 7-year bond 99-64/256 2.8691 0.094 10-year bond 100-60/256 2. 8477 0.099 20-year bond 99-200.256 3 0.096 30-year bond 96-120/256 3.0558 0.080 DOLLAR SWAP SPREADS Last (bps) Net change (bps) 2-year US dollar swap 34.25 3.00 3-year US dollar spread swap 17.25 1.25 US dollar spread 5-year swap 4.75 0.25 US dollar spread 10-year swap 8.00 1.00 US dollar spread 30-year swap -21.75 1.00 spread (Report by Gertrude Chavez -Dreyfuss in New York; Additional reporting by Yoruk Bahceli in London; Editing by Kirsten Donovan, Marguerita Choy and Andrea Ricci)