Geopolitics remained center stage during May. While a fragile ceasefire between Israel and Iran remained in effect, the Strait of Hormuz stayed largely closed, constraining energy markets and keeping oil prices elevated. Economic data continued to show a resilient U.S. economy, with moderate growth, stable labor markets, and inflation remaining above the Federal Reserve’s (Fed's) target. Core Personal Consumption Expenditures (PCE) inflation increased to 3.3% year-over-year in April, supported in part by rising technology-related prices as demand for AI infrastructure continued to outpace supply. While we continue to expect that cooling income growth and slower job growth should eventually support further disinflation, we acknowledge that resilient economic growth and a labor market that remains close to equilibrium could cause inflation to remain higher in the near term.
Market participants continued to reflect expectations that the Fed may need to increase policy rates to dampen inflation. This contrasted with the anticipated rate cuts that had been priced into markets prior to the Middle East conflict. As a result, the 2-year U.S. Treasury yield rose 14 basis points (bps) to 4.0%, while the 10-year U.S. Treasury yield increased 6 bps to 4.44%. Credit markets remained resilient despite higher rates, and heavy issuance across both corporate and securitized sectors was met with strong investor demand.
The Secured Overnight Financing Rate (SOFR) – a measure of the overnight secured borrowing rate in the U.S. – ended the month at 3.63%. At month-end, the three-month term SOFR rate was 3.66%, and the three-month U.S. Treasury bill closed at 3.68%.
