On Friday, treasury bonds witnessed a downturn throughout the trading day, reversing the positive rebound seen in the prior session.
The bond prices came under pressure early in the day and maintained the bearish trend till the afternoon, resulting in a rise in the yield for the benchmark ten-year note by 5.5 basis points to 4.504 percent. Notably, bond prices and yields are inversely related. The increase was noteworthy as it followed the ten-year yield's lowest closing level in a month on Thursday.
This shift in treasury bonds was influenced by the University of Michigan's preliminary consumer sentiment report for May. The report signified a six-month low in consumer sentiment. However, despite the drop, it showed an upward trend in inflation expectations.
According to the report, May saw a surge in the year-ahead inflation expectations to 3.5 percent, up from 3.2 percent in April. This was the highest level posted since last November's 4.5 percent. Long-term inflation expectations also exhibited a slight rise to 3.1 percent from April's 3.0 percent. These figures are significantly higher than the pre-pandemic range of 2.2-2.6 percent recorded two years ago.
Chris Zaccarelli, Chief Investment Officer for Independent Advisor Alliance, cautioned that these lower-than-expected consumer sentiment figures served as a warning that consumer conviction shouldn't be overlooked. Combined with rising inflation expectations, this poses a double challenge for the Federal Reserve, as a potential decrease in spending and an increase in inflation deviate from the 'Goldilocks' scenario of balanced growth that many had hoped for. This places the Federal Reserve in a dilemma between promoting economic growth and combating increasing inflation expectations.
The focus next week will likely shift to inflation data, as the Labor Department is scheduled to release its much-anticipated reports on consumer and producer prices for April.
