U.S. Treasury yields displayed mixed behavior on Tuesday as market participants parsed competing economic signals in advance of the Federal Reserve’s two-day policy meeting - the first under new central bank chief Kevin Warsh.
The benchmark 10-year Treasury note yield declined 1.6 basis points to 4.453%, while the two-year Treasury yield, which typically reflects expectations for short-term interest rates, rose 0.4 basis points to 4.068%.
Investors were reacting to fresh data that painted an uneven picture of price pressures and economic activity. U.S. import prices climbed 1.9% in May, comfortably above the 1% pace economists had forecast. On a year-over-year basis the import price index increased 6.7%, the largest annual rise since August 2022. Analysts at BMO noted in a Tuesday report that the rise in import prices should put upward pressure on the Personal Consumption Expenditures Price Index excluding food and energy items for May.
At the same time, data on housing activity pointed to weakness. Housing starts fell 15.4% in May, which marked the largest monthly decline since March 2024. The sizable drop in construction activity adds a growth-side counterpoint to the stronger-than-expected import price reading.
Markets broadly expect the Fed to keep policy rates unchanged when the two-day meeting concludes on Wednesday. Attention will be focused on the wording of the policy statement, any revisions to policymakers’ economic and rate projections, and comments from Warsh during the post-meeting press conference. Warsh took over the role from former Fed chair Jerome Powell last month.
With short- and longer-dated yields moving in different directions, traders appear split over the balance between inflationary forces signaled by import prices and the growth weakness implied by the drop in housing starts. The immediate market reaction will hinge on the Fed’s message and the updated projections it provides at the end of the meeting.
Summary
Treasury yields diverged ahead of the Fed’s two-day meeting led by Kevin Warsh, with the 10-year yield down and the two-year yield slightly higher. Import prices rose faster than expected in May while housing starts plunged, leaving markets to weigh inflation risks against signs of slowing activity.