Bond Market Update

Tuesday Slide Moderated

• U.S. Treasuries climbed on Wednesday with longer tenors reclaiming roughly half of their losses from Tuesday while the short end turned slightly positive for the week. The market was eager to bounce from yesterday's slide, as the complex showed some resilience in the overnight futures market. Treasuries started the day with gains that were paced by shorter tenors after a rebound in Japanese debt, though the short end lagged, leaving 2-yr JGBs with a slim loss. Japan's Finance Minister Katayama expressed confidence that the bond market will improve and that fiscal sustainability will be maintained. Treasuries defended their starting gains in morning trade with longer tenors showing intraday strength. The complex held onto its gains after the U.S. Treasury reopened $13 bln in 20-yr bonds to good demand, seeing some additional buying ahead of the close. That late bid showed up after President Trump said that he has agreed on a framework for a security deal involving Greenland and the entire Arctic region with the secretary general of NATO. The president added that additional tariffs, which were set to go into effect on February 1, will not be implemented. The comments helped secure a finish on session highs with 3s and 2s turning positive for the week. Crude oil recorded a modest gain while the U.S. Dollar Index rose 0.2% to 98.82.
• Yield Check:
  • 2-yr: UNCH at 3.60%
  • 3-yr: -2 bps to 3.66%
  • 5-yr: -3 bps to 3.83%
  • 10-yr: -4 bps to 4.25%
  • 30-yr: -5 bps to 4.87%

• News:
  • South Korea's exports were up 14.9% yr/yr through the first 20 days of January with chip exports jumping 70.2%.
  • China Securities Journal speculated that the People's Bank of China will delay its next easing move.
  • European Central Bank President Lagarde said that central bank will not always backstop fiscal spending if additional debt does not sustain growth.
  • The German government is reportedly lowering its domestic 2026 growth forecast to 1.0% from 1.3%.
  • Australia's December MI Leading Index was up 0.1% m/m (last 0.0%).
  • New Zealand's December RBNZ Offshore Holdings dipped to 57.5% from 58.0%.
  • U.K.'s December CPI was up 0.4% m/m, as expected (last -0.2%), rising 3.4% yr/yr (expected 3.3%; last 3.2%). Core CPI was up 0.3% m/m, as expected (last -0.2%), rising 3.2% yr/yr (expected 3.3%; last 3.2%). Input PPI was down 0.2% m/m (expected -0.1%; last 0.5%) and Output PPI was unchanged m/m (expected 0.1%; last 0.1%). December House Price Index was up 2.5% yr/yr (expected 1.8%; last 1.7%) and January CBI Industrial Trends Orders rose to -30 from -32 (expected -33).
• Today's Data:
  • The Department of Commerce released construction spending data for September and October as it continues to play catch-up from the government shutdown. For September, construction spending declined 0.6% month-over-month following an upwardly revised 0.4% increase (from 0.2%) in August. For October, construction spending jumped 0.5% month-over-month (Briefing.com consensus: 0.2%). Total private construction was up 0.6% month-over-month in October, while total public construction was up 0.1% month-over-month. On a year-over-year basis, total construction spending was down 1.0%.
    • The key takeaway from the report is that the rebound in October was driven by residential spending and specifically private residential improvements.
  • Pending Home Sales were down 9.3% in December (Briefing.com consensus 0.7%) after increasing 3.3% in November.
  • The weekly MBA Mortgage Index was up 14.1% after jumping 28.5% a week ago. The Purchase Index rose 5.2% while the Refinance Index was up 20.4%.
  • $13 bln 20-year Treasury bond reopening results (prior 12-auction average):
    • High yield: 4.846% (4.800%).
    • Bid-to-cover: 2.86 (2.63).
    • Indirect bid: 64.7% (65.7%).
    • Direct bid: 29.0% (21.9%).
• Commodities:
  • WTI crude: +0.4% to $60.60/bbl
  • Gold: +1.5% to $4837.00/ozt
  • Copper: -0.7% to $5.77/lb
• Currencies:
  • EUR/USD: -0.3% to 1.1688
  • GBP/USD: -0.1% to 1.3420
  • USD/CNH: +0.1% to 6.9598
  • USD/JPY: +0.2% to 158.42
• The Day Ahead:
  • 8:30 ET: October Personal Income (Briefing.com consensus 0.3%; prior 0.4%), Personal Spending (Briefing.com consensus 0.1%; prior 0.4%), PCE Price Index (Briefing.com consensus 0.2%; prior 0.3%), an Core PCE Price Index (Briefing.com consensus 0.2%; prior 0.2%), November Personal Income (Briefing.com consensus 0.4%; prior NA), Personal Spending (Briefing.com consensus 0.4%; prior NA), PCE Prices (Briefing.com consensus 0.2%; prior NA), and Core PCE Prices (Briefing.com consensus 0.2%; prior NA), Q3 GDP -- revised (Briefing.com consensus 4.3%; prior 4.3%), Q3 GDP Deflator -- revised (Briefing.com consensus 3.7%; prior 3.8%), weekly Initial Claims (Briefing.com consensus 200,000; prior 198,000), and Continuing Claims (prior 1.884 mln)
  • 10:30 ET: Weekly natural gas inventories (prior -71 bcf)
  • 12:00 ET: Weekly natural gas inventories (prior +3.39 mln)

Auction Reaction

• U.S. Treasuries have continued drifting inside a narrow sideways range with a slight upward bias that is keeping the Treasury complex in positive territory. The market has held steady despite volatility in equities, which has caused the S&P 500 (+0.4%) to give back more than half of its early gain. The U.S. Treasury just completed a $13 bln 20-yr bond reopening, which met strong demand. The sale drew a high yield of 4.846%, stopping through the when-issued yield by a basis point while the bid-to-cover ratio (2.86x) was above average (2.63x). Indirect takedown (64.7%) was a touch below average (65.7%).
• Yield Check:
  • 2-yr: -1 bp to 3.59%
  • 3-yr: -2 bps to 3.66%
  • 5-yr: -2 bps to 3.84%
  • 10-yr: -3 bps to 4.27%
  • 30-yr: -2 bps to 4.90%

Treasury Auction Results

• $13 bln 20-year Treasury bond reopening:
  • Auction results:
    • High yield: 4.846% (When-Issued: 4.856%)
    • Bid-to-cover: 2.86
    • Indirect bid: 64.7%
    • Direct bid: 29.0%
  • Average results of previous 12 auctions:
    • High yield: 4.800%
    • Bid-to-cover: 2.63
    • Indirect bid: 65.7%
    • Direct bid: 21.9%

Treasury Auction Preview

• $13 bln 20-year Treasury bond reopening (results at 13:00 ET):
  • Prior auction results:
    • High yield: 4.798%
    • Bid-to-cover: 2.67
    • Indirect bid: 65.2%
    • Direct bid: 22.2%
  • Average results of previous 12 auctions:
    • High yield: 4.800%
    • Bid-to-cover: 2.63
    • Indirect bid: 65.7%
    • Direct bid: 21.9%

Data Recon

• The Department of Commerce released construction spending data for September and October as it continues to play catch-up from the government shutdown. For September, construction spending declined 0.6% month-over-month following an upwardly revised 0.4% increase (from 0.2%) in August. For October, construction spending jumped 0.5% month-over-month (Briefing.com consensus: 0.2%). Total private construction was up 0.6% month-over-month in October, while total public construction was up 0.1% month-over-month. On a year-over-year basis, total construction spending was down 1.0%.
  • The key takeaway from the report is that the rebound in October was driven by residential spending and specifically private residential improvements.
• Yield Check:
  • 2-yr: -1 bp to 3.59%
  • 3-yr: -1 bp to 3.67%
  • 5-yr: -1 bp to 3.85%
  • 10-yr: -1 bp to 4.29%
  • 30-yr: -1 bp to 4.91%