Bond Market Update

Caught Spectating

• U.S. Treasuries had a steady showing on Tuesday, keeping yields in a narrow range just below their highest levels in three weeks, which masked a volatile session on Wall Street. The trading day started with modest gains up front and no change in the long bond after the market heard more reassurances from President Trump that all efforts are being made to produce a final peace deal with Iran. Crude oil made its way back below $90/bbl in overnight trade, reflecting the market's guarded optimism, but the overall attention quickly turned to a rough morning session on Wall Street, where aggressive selling in technology stocks contrasted with relative strength in most other sectors. Treasuries, however, were largely undisturbed, with longer tenors spending the day inside yesterday's trading range while the front end outperformed, though the 2-yr yield was never down more than five basis points for the day. Treasuries climbed past their morning highs just as equities found some midday support, defending their slim gains into the close. There was some impulse selling around noon after a social media post from President Trump served as another reminder about the volatile nature of the current peace negotiations, but the market made it back to highs in late trade. Adding to the busy midday tone, the U.S. Treasury launched this week's note and bond auction slate with a 3-yr note auction, which was received relatively well given the overall volatility across capital markets. Crude oil finished just above its May low after a brief dip past $86/bbl to levels last seen in mid-April, while the U.S. Dollar Index slipped 0.1% to 99.91, remaining just below a two-month high.
• Yield Check:
  • 2-yr: -4 bps to 4.12%
  • 3-yr: -3 bps to 4.18%
  • 5-yr: -3 bps to 4.25%
  • 10-yr: -2 bps to 4.53%
  • 30-yr: -1 bp to 5.01%

• News:
  • President Trump said in a social media post that a U.S. Army helicopter, which was reported to be in an overnight crash, was actually shot down by Iran, adding that a response is warranted. The pilots of the U.S. helicopter were unharmed.
  • Moody's Chief Economist Zandi warned that the U.S. is on the brink of a recession. 
  • Bank Indonesia unexpectedly raised its policy rate by 25 basis points to 5.50%.
  • China's government has pushed for increased local bond issuance this month, according to China Securities Journal.
  • The Confederation of British Industry lowered its domestic growth forecast for 2026 to 1.1% from 1.3% while the outlook for 2027 was reduced to 0.9% from 1.5%.
  • China's May trade surplus reached $105.43 bln (expected $92.10 bln; last $84.80 bln) as imports grew 27.4% yr/yr (expected 25.0%; last 25.3%) and exports jumped 19.4% yr/yr (expected 15.0%; last 14.1%).
  • Japan's May Machine Tool Orders were up 37.4% yr/yr (last 45.1%).
  • South Korea's Q1 GDP expanded 1.7% qtr/qtr, as expected (last -0.1%), growing 3.6% yr/yr, as expected (last 1.6%).
  • Australia's June Westpac Consumer Sentiment was down 2.9% (last 3.5%). May NAB Business Confidence rose to -14 from -23 and Business Survey remained at 3.
  • New Zealand's Q1 Manufacturing Sales Volume was up 3.6% qtr/qtr (last -0.5%).
  • Germany's April trade surplus reached EUR14.5 bln (expected surplus of EUR15.4 bln; last surplus of EUR14.7 bln) as imports grew 1.2% m/m (last 4.5%) and exports rose 0.9% m/m (last 0.3%). April Industrial Production was up 0.4% m/m, as expected (last -0.1%) but down 0.5% yr/yr (last -3.5%).
• Today's Data:
  • Existing home sales increased 3.2% month-over-month in May to a seasonally adjusted annual rate of 4.17 million from an upwardly revised 4.04 million (from 4.02 million) in April. Sales were also up 3.2% on a year-over-year basis.
    • The key takeaway from the report is that existing home sales hit their highest level since December, bolstered by lower mortgage rates (versus the year-ago period) and income gains outpacing home price growth, which led to improving affordability conditions across all regions.
  • The trade deficit narrowed to $55.9 billion in April (Briefing.com consensus: -$55.5 billion) from an upwardly revised $56.6 billion (from -$60.3 billion) in March. The narrowing was a function of exports being $8.3 billion more than March exports and imports being $7.6 billion more than March imports.
    • The key takeaway from the report is that the export strength was concentrated in crude oil exports (+$6.4 billion), fuel oil exports (+$1.3 billion), and other petroleum products (+$1.0 billion), which were boosted by the supply disruptions tied to the difficulties traversing the Strait of Hormuz.
  • Wholesale Inventories were up 0.6% month-over-month in April (Briefing.com consensus 0.5%) after increasing 1.3% in March.
  • The NFIB Small Business Optimism Index hit 95.3 in May, down from 95.9 in April.
    • $58 bln 3-year Treasury note auction results (prior 12-auction average):
    • High yield: 4.192% (3.683%).
    • Bid-to-cover: 2.64 (2.63).
    • Indirect bid: 63.7% (63.1%).
    • Direct bid: 21.0% (23.6%).
• Commodities:
  • WTI crude: -3.4% to $88.16/bbl
  • Gold: -1.7% to $4290.60/ozt
  • Copper: -0.5% to $6.32/lb
• Currencies:
  • EUR/USD: +0.1% to 1.1547
  • GBP/USD: +0.4% to 1.3385
  • USD/CNH: -0.1% to 6.7771
  • USD/JPY: +0.2% to 160.38
• The Day Ahead:
  • 7:00 ET: Weekly MBA Mortgage Index (prior -2.3%)
  • 8:30 ET: May CPI (Briefing.com consensus 0.5%; prior 0.6%) and Core CPI (Briefing.com consensus 0.3%; prior 0.4%)
  • 10:30 ET: Weekly crude oil inventories (prior -7.97 mln)
  • 14:00 ET: May Treasury Budget (prior $215.0 bln)
• Treasury Auctions:
  • 13:00 ET: $39 bln 10-yr Treasury note reopening results

Auction Reaction

• U.S. Treasuries are back near their starting levels after reversing from highs in reaction to a social media post from President Trump, in which he said that Iran shot down a U.S. military helicopter yesterday. The market already knew about an incident involving a helicopter with no casualties, but the acknowledgement from President Trump that Iran is responsible and his call for a response introduces another wrinkle into the volatile negotiations. Meanwhile, the U.S. Treasury just completed today's $58 bln 3-yr note sale to ok demand. The auction was well received when compared to the prior-12 auction averages with the bid-to-cover ratio (2.64x vs 2.63x) and indirect takedown (63.7% vs 63.1% average) coming in above average, but the high yield (4.192%) tailed the when-issued yield (4.189%) by 0.3 bps, meaning the market expected a slightly better uptake, though today's intraday volatility is likely responsible for the slight miss.
• Yield Check:
  • 2-yr: -3 bps to 4.13%
  • 3-yr: -2 bps to 4.19%
  • 5-yr: -2 bps to 4.26%
  • 10-yr: -2 bps to 4.54%
  • 30-yr: -1 bp to 5.02%

Treasury Auction Results

• $58 bln 3-year Treasury note auction:
  • Auction results:
    • High yield: 4.192% (When-Issued: 4.189%)
    • Bid-to-cover: 2.64
    • Indirect bid: 63.7%
    • Direct bid: 21.0%
  • Average results of previous 12 auctions:
    • High yield: 3.683%
    • Bid-to-cover: 2.63
    • Indirect bid: 63.1%
    • Direct bid: 23.6%

Early Gains Sustained

• U.S. Treasuries trade on their highs after a late-morning rally off their unchanged levels past their morning highs. The recent push took place amid significant weakness in technology stocks, which has driven the S&P 500 (-1.6%) back to levels seen in early May. Interestingly, the gains in Treasuries have been limited when compared to the steep selling in stocks. The 10-yr yield hit a high just below 4.56% around 11:30 ET and is now down only four basis points from that level, approaching yesterday's low. The U.S. Treasury will sell $58 bln in 3-yr notes atop the hour.
• Yield Check:
  • 2-yr: -4 bps to 4.12%
  • 3-yr: -4 bps to 4.17%
  • 5-yr: -3 bps to 4.25%
  • 10-yr: -3 bps to 4.52%
  • 30-yr: -1 bp to 5.01%

Treasury Auction Preview

• $58 bln 3-year Treasury note auction (results at 13:00 ET):
  • Prior auction results:
    • High yield: 3.879%
    • Bid-to-cover: 2.68
    • Indirect bid: 74.8%
    • Direct bid: 11.9%
  • Average results of previous 12 auctions:
    • High yield: 3.683%
    • Bid-to-cover: 2.63
    • Indirect bid: 63.1%
    • Direct bid: 23.6%