Bond Market Update

Short End Outperforms Ahead of January FOMC Statement

• U.S. Treasuries had a mixed showing on Tuesday with 10s and 30s recording modest losses while the 2-yr note outperformed after lagging on Monday. The trading day started with slim losses across the curve with longer tenors underperforming out of the gate. The entire complex bounced in mid-morning action, reaching highs after the release of a disappointing Consumer Confidence report for January (84.5; Briefing.com consensus 90.0), which hit its lowest level since mid-2014. The 10-yr note briefly turned positive in immediate reaction to the report, but turned quickly, spending the rest of the day in a slow retreat from highs while shorter tenors resisted the pressure even though today's $70 bln 5-yr note auction met weaker demand than yesterday's stellar 2-yr note sale. Today's action kept the 10-yr yield just below its 200-day moving average (4.234%) while the 5-yr yield settled just above the 200-day moving average of its own (3.808%) leading into tomorrow's FOMC Statement, which is not expected to call for any policy changes. Crude oil reached its best settlement since October while continued pressure on the U.S. Dollar Index sent it to a level not seen since February 2022. The Index fell 0.8% to 96.23, widening its January loss to 2.1%.
• Yield Check:
  • 2-yr: -2 bps to 3.57%
  • 3-yr: -1 bp to 3.64%
  • 5-yr: UNCH at 3.81%
  • 10-yr: +1 bp to 4.22%
  • 30-yr: +3 bps to 4.83%

• News:
  • President Trump said last evening that the tariff on imports from South Korea will be increased to 25% from 15% because South Korean legislature has not passed the trade agreement that was made with the U.S. However, South Korea's parliament is still expected to ratify the deal by the end of February.
  • China's Ministry of Commerce said that it will create conditions for attracting foreign investment.
  • China warned its citizens against traveling to Japan for Lunar New Year, claiming "severe" safety threats.
  • The EU signed a trade deal with India,
  • Germany's economy minister said that he expects some debt-fueled growth this year but does not expect it to be sustainable.
  • European Central Bank policymaker Kocher said that "a lot" has happened since the last ECB meeting and that the ability to act quickly and decisively is important. This comes after multiple ECB policymakers said that policy is in a good place in recent weeks.
  • China's December Industrial Profit was up 0.6% YTD (last 0.1%).
  • Japan's December Corporate Services Price Index was up 2.6% yr/yr (expected 2.7%; last 2.7%). November BoJ Core CPI was up 1.9% (expected 2.0%; last 2.2%).
  • South Korea's January Consumer Confidence rose to 73.0 from 70.0.
  • Hong Kong's December trade deficit reached $63.3 bln (last deficit of $48.5 bln) as imports grew 30.6% m/m (last 18.1%) and exports rose 26.1% m/m (last 18.8%).
  • Australia's December NAB Business Survey rose to 9 from 7 and Business Confidence rose to 3 from 2.
  • New Zealand's December Credit Card Spending was down 0.3% yr/yr (last 4.4%).
  • France's January Consumer Confidence remained at 90, as expected.
  • Spain's Q4 Unemployment Rate fell to 9.93% from 10.45% (expected 10.20%).
• Today's Data:
  • The Conference Board's Consumer Confidence Index dropped to 84.5 in January (Briefing.com consensus: 90.0) from an upwardly revised 94.2 (from 89.1) in December. In the same period a year ago, the index stood at 105.3.
    • The key takeaway from the report is that consumer concerns about both the present situation and expectations for the future deepened, driving the overall index to a level that was lower than the depths seen during the COVID pandemic.
  • The FHFA Housing Price Index was up 0.6% in November (Briefing.com consensus 0.3%) after increasing 0.4% in October.
  • The S&P Case-Shiller Home Price Index was up 1.4% year-over-year in November (Briefing.com consensus 1.2%) after being up 1.3% in October.
  • $70 bln 5-year Treasury note auction results (prior 12-auction average):
    • High yield: 3.823% (3.904%).
    • Bid-to-cover: 2.34 (2.37).
    • Indirect bid: 60.7% (65.5%).
    • Direct bid: 28.5% (23.8%).
• Commodities:
  • WTI crude: +2.9% to $62.39/bbl
  • Gold: UNCH at $5082.60/ozt
  • Copper: -2.7% to $5.86/lb
• Currencies:
  • EUR/USD: +0.8% to 1.1978
  • GBP/USD: +0.8% to 1.3780
  • USD/CNH: -0.1% to 6.9412
  • USD/JPY: -0.9% to 152.70
• The Day Ahead:
  • 7:00 ET: Weekly MBA Mortgage Index (prior 14.1%)
  • 10:30 ET: Weekly crude oil inventories (prior +3.60 mln)
  • 14:00 ET: January FOMC Decision (Briefing.com consensus 3.50-3.75%; prior 3.50-3.75%)

Auction Reaction

• U.S. Treasuries trade a bit below their rebound highs with 10s and 30s remaining in the red while shorter tenors are hanging onto modest gains. There has been very little movement over the past three hours with the market seeing some light pressure in immediate reaction to the just completed $70 bln 5-yr note sale. The offering drew a high yield of 3.823%, which tailed the when-issued yield by 0.3 bps, while the bid-to-cover ratio (2.34x vs 2.37x average) and indirect takedown (60.7% vs 65.5% average) were below average. The U.S. Treasury will complete this week's note auction slate with a $44 bln 7-yr note auction on Thursday since the FOMC Decision will command the market's attention tomorrow afternoon.
• Yield Check:
  • 2-yr: -1 bp to 3.58%
  • 3-yr: -1 bp to 3.64%
  • 5-yr: UNCH at 3.82%
  • 10-yr: +2 bps to 4.23%
  • 30-yr: +3 bps to 4.84%

Treasury Auction Results

• $70 bln 5-year Treasury note auction:
  • Auction results:
    • High yield: 3.823% (When-Issued: 3.820%)
    • Bid-to-cover: 2.34
    • Indirect bid: 60.7%
    • Direct bid: 28.5%
  • Average results of previous 12 auctions:
    • High yield: 3.904%
    • Bid-to-cover: 2.37
    • Indirect bid: 65.5% 
    • Direct bid: 23.8%

Treasury Auction Preview

• $70 bln 5-year Treasury note auction (results at 13:00 ET):
  • Prior auction results:
    • High yield: 3.747%
    • Bid-to-cover: 2.35
    • Indirect bid: 59.5%
    • Direct bid: 31.7%
  • Average results of previous 12 auctions:
    • High yield: 3.904%
    • Bid-to-cover: 2.37
    • Indirect bid: 65.5%
    • Direct bid: 23.8%

Resilience on Display

• U.S. Treasuries have risen off their early lows with the short end leading the way while the long bond has also climbed off its starting level, but it remains modestly lower at this juncture. The rebound began taking shape shortly after the cash start with the 10-yr note returning to unchanged after the release of a weak Consumer Confidence Index for January (84.5; Briefing.com consensus 90.0). Equities are off to a mixed start with the S&P 500 (+0.4%) and Nasdaq (+0.8%) trading higher while the Dow (-1.0%) lags.
• Yield Check:
  • 2-yr: -2 bps to 3.57%
  • 3-yr: -1 bp to 3.64%
  • 5-yr: -1 bp to 3.81%
  • 10-yr: UNCH at 4.21%
  • 30-yr: +1 bp to 4.82%