US yields flat to marginally higher following durables data

U.S. Treasury yields were little changed to slightly higher on Friday in choppy trading after yet another report suggesting that the world's largest economy is far from slowing down, which is likely to push the Federal Reserve to hold off cutting interest rates this year.

Volume is thinner than usual ahead of the Memorial Day holiday on Monday.

Friday's data showed new orders for key U.S.-manufactured capital goods rose more than expected in April and shipments of these goods also increased, which indicated that business spending on equipment picked up early in the second quarter.

Non-defense capital goods orders excluding aircraft, a closely-watched proxy for business spending plans, gained 0.3% last month after an upwardly revised 0.1% dip in March, the Commerce Department's Census Bureau said on Friday.

Economists polled by Reuters had forecast these so-called capital goods orders edging up 0.1% after declining by a previously reported 0.2% in March.

Friday's numbers followed equally robust data on Thursday, which showed that U.S business activity accelerated to its highest level in more than two years in May and initial jobless claims dropping in the latest week as labor market tightness persisted.

In all likelihood, Thierry Albert Wizman, global FX and rates strategist, at Macquarie in New York said the Fed's dot plot, or its interest rate forecasts, in the medium to long term will be higher, citing the central bank's minutes released earlier this week which said there are potentially inflationary factors within that time frame.

"What this means is that the market is getting a little bit worried that even though that we continue to expect that the Fed will cut, the extent of the easing cycle will not be that great," Wizman said.

"Maybe we'll get 75 or 100 basis points in cuts and then we'll kind of level off at 4%. And if that's the case and you believe that the yield curve will be upward sloping, then we're going to settle at a 10-year yield of slightly above 4%, or maybe 4.75% looks better or right in that context."

The benchmark U.S. 10-year yield advanced to a more than one-week peak of 4.502% and was last marginally up at 4.478 US10Y. For the week, the 10-year yield gained 5.9 basis points (bps), on pace for its biggest weekly gain since mid-April.

U.S. 30-year yields edged up to 4.583% (US30YT=RR).

On the shorter end of the curve, the U.S. two-year yield, which typically reflects rate move expectations, inched up to 4.939% (US2YT=RR). Earlier in the session, it hit 4.959%, matching a three-week peak touched on Thursday.

On the week, two-year yields posted an 11.5 basis-point gain, on track for its largest weekly rise since the week of April 8.

The U.S. yield curve, meanwhile, was little changed from late on Thursday. The spread between U.S. two- and 10-year yields, which historically has predicted the onset of recession, was last at minus 46.3 bps (US2US10=TWEB).

That curve widened by as much as minus 47.7 bps on Thursday following a strong business activity report, the most inverted since March 12.

Following the durables data, U.S. rate futures priced in one rate cut of 25 bps in 2024, possibly starting in September or November, according to LSEG's rate probability app. For the last few weeks, the futures market had been pricing in two cuts due the weaker-than-expected economic data.