The keen among you might’ve perceived the faintest hint of a “good news is bad news” trade as Q2 commenced.

It’d be asinine to read anything into holiday-thinned price action on the first day of a new month (and a new quarter), but I’d be remiss not to at least mention the move in US rates.

Treasurys were cheaper by up to 13bps from the belly on out the curve into the US afternoon, an apparent nod to the read-through from a surprisingly robust update on America’s marquee gauge of manufacturing activity, which crossed the threshold into expansion territory for the first time since September of 2022.

The selloff in benchmark US notes was among the most pronounced of 2024.

I can’t emphasize enough how absurd it’d be to draw conclusions based on price action from the first day of a new quarter following a holiday weekend, but to the extent you can divine anything about the mood in rates in the context of a Fed that’s been clear about its intention to cut irrespective of macro strength (provided inflation doesn’t re-accelerate), a bear steepener in the presence of robust data makes sense.

If it’s too much to say the Fed’s “determined to cut,” we can just say they’re determined that terminal was reached last summer. Given that, the scope for the front-end to sell off in response to data overshoots (other than upside reads on inflation and/or wage growth) is limited. So, the belly and out is where the pressure will show up. That’s what you saw Monday, with 10s cheaper by 13bps and twos by “only” nine.

That’s certainly not to say the front-end’s completely incapable of pricing out Fed cuts just because the median 2024 marker escaped March’s dot plot refresh intact (i.e., still showing three “expected” reductions). Indeed, the market-implied odds of the first cut coming in June slipped below a coin toss at one juncture on Monday.

At the same time, pricing for the full year receded to a mere 65bps, nearly “half a cut” (if you will) less than the 2024 median dot, as illustrated above.

Still, it’d take a succession of upside surprises to push market pricing too far to the hawkish side of this year’s dot, and at least some of those surprises would need to come from inflation or wage data. Barring that, the long-end should see relatively more pressure on days when the macro’s robust given the implications of a relatively dovish Fed in a run-it-hot economy.

Stocks didn’t love it on Monday. Remember: When it comes to rate-rise and equities, it’s very often more about the rapidity of a given move higher in bond yields than it is any specific level. ~13bps on 10s based on a single data point (ISM manufacturing) was enough to cause a little indigestion for stocks riding a sugar high from Q1 and chocolate Easter eggs.