Bond Market Update

Data Recon

• The Producer Price Index for final demand increased 0.5% month-over-month in January (Briefing.com consensus: 0.3%) following a downwardly revised 0.4% increase (from 0.5%) in December. The Producer Price Index for final demand, excluding food and energy, surged 0.8% month-over-month (Briefing.com consensus: 0.3%) following a 0.6% increase in December. The Producer Price Index for final demand was up 2.9% year-over-year, versus 3.0% in December, but the Producer Price Index for final demand, excluding food and energy, was up 3.6%, versus 3.3% in December.
  • The key takeaway from the report was rooted in the worrying core-PPI component, as that will foment concerns about pass-through to consumer prices that will likely keep the Fed leery about cutting rates soon.
• Yield Check:
  • 2-yr: -4 bps to 3.41%
  • 3-yr: -5 bps to 3.41%
  • 5-yr: -4 bps to 3.54%
  • 10-yr: -3 bps to 3.99%
  • 30-yr: -2 bps to 4.65%

Extending Thursday Gains

• U.S. Treasuries are on track for a higher start with the 5-yr yield joining yields on 10s and 30s at fresh lows for the year. Treasury futures spent the early portion of the night in a sideways range, climbing to highs once the focus shifted to action in Europe. The recent advance in Treasury futures was not part of a broader trend, though other sovereign debt has seen some recent strength. Economic data released overnight showed decelerating Tokyo Core CPI in Japan (to 1.8% yr/yr from 2.0%) and accelerating CPI in France (to 1.0% yr/yr from 0.3%). Inflation will also be the theme during the U.S. session with January PPI (Briefing.com consensus 0.3%; prior 0.5%) and Core PPI (Briefing.com consensus 0.3%; prior 0.6%) scheduled to be released at 8:30 ET. Crude oil is approaching its Q1 high from Monday (67.28) while the U.S. Dollar Index is down 0.1% at 97.73.
• Yield Check:
  • 2-yr: -5 bps to 3.40%
  • 3-yr: -5 bps to 3.41%
  • 5-yr: -4 bps to 3.54%
  • 10-yr: -3 bps to 3.98%
  • 30-yr: -3 bps to 4.64%

• News:
  • The People's Bank of China will scrap the 20% reserve requirement ratio for forward foreign exchange sales on Monday.
  • China's National People's Congress will start on Thursday with press reports suggesting that the party will seek to promote social welfare and sustainability rather than growth at all costs.
  • Japan's Economy Minister Kiuchi said that signs of inflation are slowing and that real wages should turn positive soon.
  • U.K.'s Labour party came in third place in a regional by-election, serving as a reminder of weak support for the ruling party and Prime Minister Starmer.
  • Japan's February Tokyo CPI was up 1.6% yr/yr (last 1.5%) and Tokyo Core CPI was up 1.8% yr/yr (expected 1.7%; last 2.0%). January Industrial Production rose 2.2% m/m (expected 5.5%; last -0.1%), January Retail Sales rose 1.8% yr/yr (expected 0.1%: last -0.9%), January Construction Orders rose 5.7% yr/yr (last 20.2%) and January Housing Starts were down 0.4% yr/yr (expected -1.9%; last -1.3%).
  • Hong Kong's January trade deficit reached HKD14.1 bln (last deficit of HKD63.3 bln) as imports grew 38.1% m/m (last 30.6%) and exports rose 33.8% m/m (last 26.1%).
  • Australia's January Private Sector Credit was up 0.5% m/m (expected 0.7%; last 0.8%) and Housing Credit was up 0.6% m/m (last 0.7%).
  • India's Q3 GDP expanded 7.8% yr/yr (expected 7.2%; last 8.2%).
  • Germany's flash February CPI was up 0.2% m/m (expected 0.5%; last 0.1%), rising 1.9% yr/yr (expected 2.0%; last 2.1%); January Import Prices Index was up 1.1% m/m (expected 0.6%; last -0.1%) but down 2.3% yr/yr (last -2.3%).
  • France's Q4 GDP expanded 0.2% qtr/qtr, as expected (last 0.2%), growing 1.1% yr/yr, as expected (last 0.9%). Q4 Nonfarm Payrolls decreased 0.1% qtr/qtr, as expected (last -0.1%). January Consumer Spending was up 0.5% m/m (expected 0.4%; last -0.5%). February CPI was up 0.7% m/m (expected 0.5%; last -0.3%), rising 1.0% yr/yr (expected 0.8%; last 0.3%). February PPI was up 0.5% m/m (last 0.3%). January Jobseeker total decreased to 3.09 mln from 3.117 mln.
  • Spain's February CPI was up 0.4% m/m (last -0.4%), rising 2.3% yr/yr (expected 2.2%; last 2.3%). December Current Account surplus reached EUR1.80 bln (last surplus of EUR210 mln)
  • Swiss Q4 GDP expanded 0.1% qtr/qtr (expected 0.2%; last -0.4%), growing 0.7% yr/yr (last 0.6%). February KOF Leading Indicators rose to 104.2 from 103.3 (expected 103.0).
• Commodities:
  • WTI Crude: +2.8% to $67.02/bbl
  • Gold: +0.2% to $5203.00/ozt
  • Copper: +2.0% to $6.126/lb
• Currencies:
  • EUR/USD: UNCH at 1.1800
  • GBP/USD: -0.1% to 1.3462
  • USD/CNH: +0.3% to 6.8608
  • USD/JPY: -0.1% to 155.98
• Data out Today:
  • 8:30 ET: January PPI (Briefing.com consensus 0.3%; prior 0.5%) and Core PPI (Briefing.com consensus 0.3%; prior 0.6%)
  • 9:45 ET: February Chicago PMI (Briefing.com consensus 52.5; prior 54.0)
  • 10:00 ET: November Construction Spending (Briefing.com consensus 0.3%: prior 0.5%)

Longer Tenors Stay at Q1 Highs

• U.S. Treasuries climbed on Thursday, sending yields on 10s and 30s to their lowest closing levels of the year while shorter tenors also recorded solid gains, though their yields remained a bit above 2026 lows. The trading day started in quiet fashion after a night that featured falling expectations for an April rate hike from the Bank of Japan and a data slate that was free of big surprises. Treasuries held their ground through the morning release of a jobless claims report (212,000; Briefing.com consensus 211,000), which was a bit worse than expected, climbing to highs alongside a weak open on Wall Street that was owed to renewed volatility in the technology sector. Treasuries reached their best levels around 10:00 ET, staying just below their highs into the close. The U.S. Treasury completed this week's note auction slate with a solid sale of $44 bln in 7-yr notes. Crude oil ended the day little changed after swinging inside a big range amid ongoing uncertainty related to Iran. Diplomats from the U.S. and Iran met in Geneva today and their meeting was deemed constructive, but there were no other details. The U.S. Dollar Index rose 0.1% to 97.79, staying near its 50-day moving average (97.92).
• Yield Check:
  • 2-yr: -2 bps to 3.45%
  • 3-yr: -3 bps to 3.46%
  • 5-yr: -4 bps to 3.58%
  • 10-yr: -3 bps to 4.02%
  • 30-yr: -3 bps to 4.67%

• News:
  • The Bank of Korea left its policy rate at 2.50%, as expected. Governor Rhee said that South Korea's inclusion in the MSCI Developed Market Index could boost inflows of foreign capital.
  • The U.K. reached a critical minerals deal with Kazakhstan.
  • Iceland will hold a referendum on resuming EU accession talks.
  • Japan's December Leading Index rose to 111.0 from 109.9 (expected 110.2) and Coincident Indicator was down 0.6% m/m (expected -0.4%; last -1.0%).
  • Singapore's Q4 GDP expanded 2.1% qtr/qtr (expected 1.9%; last 2.6%). January Industrial Production was up 5.3% m/m (expected 4.5%; last -0.3%), rising 16.6% yr/yr (expected 11.0%; last 10.9%).
  • Australia's Q4 Building Capital Expenditure increased by 2.3% (last 2.3%) and Private New Capital Expenditure was up 0.4% qtr/qtr (expected -0.1%; last 6.4%).
  • New Zealand's February ANZ Business Confidence fell to 59.2 from 64.1.
  • Eurozone's February Business and Consumer Survey fell to 98.3 from 99.3 (expected 99.8). January Private Sector Loans rose 3.0% yr/yr (expected 3.1%; last 3.0%) and January loans to nonfinancials rose 2.8% yr/yr (expected 3.1%; last 3.0%).
  • Italy's February Consumer Confidence rose to 97.4 from 96.8 (expected 97.2) and Business Confidence fell to 88.5 from 89.2.
  • Swiss Q4 Employment Level increased to 5.544 mln from 5.532 mln.
• Today's Data:
  • Initial jobless claims for the week ending February 21 increased by 4,000 to 212,000 (Briefing.com consensus: 211,000). Continuing jobless claims for the week ending February 14 decreased by 31,000 to 1.833 million.
    • The key takeaway from the report is its persistent low-firing, low-hiring messaging.
  • Weekly natural gas inventories decreased by 52 bcf after decreasing by 144 bcf a week ago.
  • $44 bln 7-year Treasury note auction results (prior 12-auction average):
    • High yield: 3.790% (4.021%).
    • Bid-to-cover: 2.50 (2.54).
    • Indirect bid: 63.6% (64.4%).
    • Direct bid: 26.0% (25.2%).
• Commodities:
  • WTI crude: -0.4% to $65.21/bbl
  • Gold: -0.6% to $5194.10/ozt
  • Copper: -0.5% to $6.01/lb
• Currencies:
  • EUR/USD: -0.1% to 1.1798
  • GBP/USD: -0.5% to 1.3488
  • USD/CNH: -0.1% to 6.8422 
  • USD/JPY: -0.2% to 156.10
• The Day Ahead:
  • 8:30 ET: January PPI (Briefing.com consensus 0.3%; prior 0.5%) and Core PPI (Briefing.com consensus 0.3%; prior 0.6%)
  • 9:45 ET: February Chicago PMI (Briefing.com consensus 52.5; prior 54.0)
  • 10:00 ET: November Construction Spending (Briefing.com consensus 0.3%: prior 0.5%)

Auction Reaction

• U.S. Treasuries hover a bit below session highs that were notched alongside a weak open in equities. The belly took the lead as stocks opened in poor fashion, and it has stayed slightly ahead since then. Today's rally has received some added encouragement from the just completed $44 bln 7-yr note sale, which was an improvement from this week's mediocre 2- and 5-yr note offerings. The 7-yr auction drew a high yield of 3.790%, which was right on the screws. However, the bid-to-cover ratio (2.50x vs 2.54x average) and indirect takedown (63.6% vs 64.4% average) were a touch below average.
• Yield Check:
  • 2-yr: -3 bps to 3.44%
  • 3-yr: -4 bps to 3.45%
  • 5-yr: -4 bps to 3.58%
  • 10-yr: -3 bps to 4.02%
  • 30-yr: -2 bps to 4.67%

Treasury Auction Results

• $44 bln 7-year Treasury note auction:
  • Auction results:
    • High yield: 3.790% (When-Issued: 3.790%)
    • Bid-to-cover: 2.50
    • Indirect bid: 63.6%
    • Direct bid: 26.0%
  • Average results of previous 12 auctions:
    • High yield: 4.021%
    • Bid-to-cover: 2.54
    • Indirect bid: 64.4%
    • Direct bid: 25.2%