Markets saw moderate rate movement last week, with the 5-year Treasury yield rising 12 bps and similar increases in 2- and 10-year swaps. While the May jobs report surprised to the upside with a 139,000 print, gains were narrowly concentrated in just two sectors. Coupled with soft ADP and persistent jobless claims, the labor picture remains mixed.
Average hourly earnings were solid, pushing rates higher and feeding into expectations for fewer Fed cuts. Markets now price in just 1.8 cuts for 2025, down from 3.1 sixty days ago. Despite this, the house view remains that cuts are underpriced given softening inflation and cracks in the labor market. The Fed remains in a blackout period ahead of its June 18th meeting.
Looking ahead, CPI and PPI prints this week—alongside 3-, 10-, and 30-year Treasury auctions—will shape market sentiment. Meanwhile, the ECB’s recent rate cut highlights the divergence in global monetary policy and may increase pressure on the Fed.
On the financing front, agency market activity ticked up, with Farm Credit and home loan banks pricing new bullets—an encouraging sign for liquidity. However, agency lenders are struggling to compete in some markets where regional banks are offering aggressive, flexible terms.
From a strategic lens, floating-rate borrowers should keep hedges short and nimble, while fixed-rate borrowers may consider locking in as the curve steepens. Despite ongoing defaults and uncertainty, sentiment is shifting toward being at or near the bottom of the cycle. Larger transactions continue, and private equity is positioning for distressed opportunities in late 2025.
