Bond Market Update

Longer Tenors Extend Recent Losses Amid Stubborn Q4 Inflation and Tariff Uncertainty

• U.S. Treasuries finished a down week with modest losses in most tenors, keeping yields above February lows that were reached on Tuesday. The trading day started with modest gains that were paced by the belly after a busy night on the global data front. Japan's flash Manufacturing PMI for February (52.8) showed accelerating activity at a pace not seen since early 2022 while readings from Europe continued their longstanding anemic trend. The modest opening gains were reversed after the market received the advance reading of Q4 GDP, which showed a disappointing combination of disappointing headline growth (1.4%; Briefing.com consensus 3.0%) and a hotter than expected Chain Deflator (3.7%; Briefing.com consensus 3.3%). The pullback from starting highs deepened a bit later once the market learned that the Supreme Court ruled 6-3 against President Trump's IEEPA tariffs. However, the ruling is not expected to lead to a full rescission of tariffs, but rather an adjustment to the avenues through which these duties are implemented. Treasuries reached lows shortly after 10:00 ET with longer tenors remaining not far from their lows until the close while 5s and shorter tenors recovered the bulk of their losses that resulted from the Supreme Court announcement, though they still underperformed for the week. Crude oil recorded a slight gain after marking a fresh 2026 high (67.05) ahead of a weekend that could bring military action against Iran. The U.S. Dollar Index slipped 0.1% to 97.81, trimming this week's gain to 1.0% with its 50-day moving average (97.96) right above.
• Yield Check:
  • 2-yr: +1 bp to 3.48% (+7 bps this week)
  • 3-yr: UNCH at 3.50% (+5 bps this week)
  • 5-yr: UNCH at 3.65% (+4 bps this week)
  • 10-yr: +1 bp to 4.09% (+3 bps this week)
  • 30-yr: +2 bps to 4.73% (+3 bps this week)

• News:
  • President Trump will visit China between March 31 and April 2.
  • Indonesia finalized its trade agreement with the U.S.
  • Bank Indonesia held its policy rate at 4.75%.
  • Bangko Sentral ng Pilipinas cut its rate by 25 basis points to 4.25%.
  • European Central Bank President Lagarde repeated that she intends to serve through 2027 amid reports that she is looking to leave her post to get involved in shaping the next presidential election in France.
  • Japan's January National CPI was down 0.2% m/m (last -0.2%) but up 1.5% yr/yr (last 2.1%). National Core CPI was up 2.0% yr/yr, as expected (last 2.4%). Flash February Manufacturing PMI hit 52.8 (expected 51.3; last 51.5) and flash Services PMI hit 53.8 (last 53.7).
  • Hong Kong's January Unemployment Rate rose to 3.9% from 3.8%.
  • Australia's flash February Manufacturing PMI hit 51.5 (last 52.3) and flash Services PMI hit 52.2 (last 52.3).
  • New Zealand's January trade deficit reached NZD519 mln (expected deficit of NZD745 mln; last deficit of NZD88 mln).
  • India's flash February Manufacturing PMI hit 57.5 (last 55.4) and flash Services PMI hit 58.4 (last 58.5).
  • Eurozone's flash February Manufacturing PMI hit 50.8 (expected 49.9; last 49.5) and flash Services PMI hit 51.8 (expected 51.9; last 51.6).
  • Germany's January PPI was down 0.6% m/m (expected 0.3%; last -0.2%), falling 3.0% yr/yr (expected -2.1%; last -2.5%). Flash February Manufacturing PMI hit 50.7 (expected 49.6; last 49.1) and flash Services PMI hit 53.4 (expected 52.4; last 52.4).
  • U.K.'s January Retail Sales rose 1.8% m/m (expected 0.2%; last 0.4%), increasing 4.5% yr/yr (expected 2.8%; last 1.9%). January Core Retail Sales were up 2.0% m/m (expected 0.2%; last 0.3%), rising 5.5% yr/yr (expected 3.6%; last 2.5%). February flash Manufacturing PMI hit 52.0 (expected 51.5; last 51.8) and flash Services PMI hit 53.9 (expected 53.5; last 54.0) 
  • France's flash February Manufacturing PMI hit 49.9 (expected 50.9; last 51.2) and flash Services PMI hit 49.6 (expected 49.1; last 48.4).
• Today's Data:
  • Personal income increased 0.3% month-over-month in December, as expected, following an upwardly revised 0.4% increase (from 0.3%) in November. Personal spending was up 0.4% month-over-month (Briefing.com consensus: 0.2%) following a downwardly revised 0.4% increase (from 0.5%) in November. The PCE Price Index jumped 0.4% month-over-month (Briefing.com consensus: 0.3%), while the core PCE Price Index, which excludes food and energy, also rose 0.4% month-over-month. On a year-over-year basis, the PCE Price Index increased 2.9%, versus 2.8% in November, and the core PCE Price Index increased 3.0%, versus 2.8% in November.
    • The key takeaway from the report, other than the fact that spending outpaced income in December, is that the core PCE Price Index sported a 3-handle on a year-over-year basis. This is a key inflation gauge for the Fed, and it doesn't hold the key to a near-term rate cut.
  • The Advance Q4 GDP report also had a mixed tone. Overall growth was disappointing, with real GDP increasing at an annual rate of 1.4% (Briefing.com consensus: 3.0%) on the heels of a 4.4% increase in the third quarter. The GDP Price Deflator increased 3.6% (Briefing.com consensus: 3.3%) versus 3.8% in the third quarter.
    • The key takeaway from the report was the combination of weak growth and stubbornly high inflation in the fourth quarter, both of which run afoul of a market narrative that has been concentrated on stronger growth and lower inflation.
  • New home sales declined 1.7% month-over-month in December to a seasonally adjusted annual rate of 745,000 units (Briefing.com consensus: 714,000) versus 758,000 units in November. On a year-over-year basis, new home sales were up 3.8%.
    • The key takeaway from the report is that the weakest growth was concentrated in the nation's largest new home market--the South--underscoring the prevailing weakness in the housing market that has coincided with affordability constraints driven by higher prices and higher mortgage rates.
  • The S&P Global U.S. Manufacturing PMI hit 51.2 in the flash reading for February, down from 52.4 in January.
  • The S&P Global U.S. Services PMI hit 52.3 in the flash reading for February, down from 52.7 in January.
• Commodities:
  • WTI crude: +0.1% to $66.49/bbl
  • Gold: +1.7% to $5079.90/ozt
  • Copper: +1.7% to $5.84/lb
• Currencies:
  • EUR/USD: +0.1% to 1.1779
  • GBP/USD: +0.2% to 1.3485
  • USD/CNH: UNCH at 6.8984
  • USD/JPY: UNCH at 155.08
• The Week Ahead:
  • Monday: December Factory Orders (Briefing.com consensus 0.9%; prior 2.7%) at 10:00 ET
  • Tuesday: December FHFA Housing Price Index (Briefing.com consensus 0.4%; prior 0.6%) and December S&P Case-Shiller Home Price Index (Briefing.com consensus 1.4%; prior 1.4%) at 9:00 ET; February Consumer Confidence (Briefing.com consensus 86.0; prior 84.5) and December Wholesale Inventories (Briefing.com consensus 0.2%; prior 0.2%) at 10:00 ET; and $69 bln 2-yr Treasury note auction results at 13:00 ET
  • Wednesday: Weekly MBA Mortgage Index (prior 2.8%) at 7:00 ET; January New Home Sales (prior NA); weekly crude oil inventories (prior -9.01 mln) at 10:30 ET; and $70 bln 5-yr Treasury note auction results at 13:00 ET
  • Thursday: Weekly Initial Claims (Briefing.com consensus 211,000; prior 206,000) and Continuing Claims (prior 1.869 mln) at 8:30 ET; weekly natural gas inventories (prior -144 bcf) at 12:00 ET; and $44 bln 7-yr Treasury note auction results at 13:00 ET
  • Friday: January PPI (Briefing.com consensus 0.3%; prior 0.5%) and Core PPI (Briefing.com consensus 0.3%; prior 0.6%) at 8:30 ET; and February Chicago PMI (Briefing.com consensus 52.5; prior 54.0) at 9:45 ET; and November Construction Spending (Briefing.com consensus 0.3%: prior 0.5%) at 10:00 ET

Longer Tenors on Lows

• Longer-dated Treasuries trade just above lows that were reached in immediate reaction to the news that the Supreme Court ruled against President Trump's tariff policy while shorter tenors hover a bit closer to the midpoint of today's range. All in all, the market's reaction to the news was not too aggressive, suggesting that the ruling was largely priced in with a likely expectation that the administration will attempt to restore some tariffs using other avenues. Equities are tracking a higher finish to the week with the S&P 500 (+0.4%) now up 0.7% since last Friday.
• Yield Check:
  • 2-yr: +1 bp to 3.48%
  • 3-yr: +1 bp to 3.51%
  • 5-yr: +1 bp to 3.66%
  • 10-yr: +2 bps to 4.10%
  • 30-yr: +4 bps to 4.74%

Data Recon

• New home sales declined 1.7% month-over-month in December to a seasonally adjusted annual rate of 745,000 units (Briefing.com consensus: 714,000) versus 758,000 units in November. On a year-over-year basis, new home sales were up 3.8%.
  • The key takeaway from the report is that the weakest growth was concentrated in the nation's largest new home market--the South--underscoring the prevailing weakness in the housing market that has coincided with affordability constraints driven by higher prices and higher mortgage rates.
• The final University of Michigan Consumer Sentiment reading for February decreased to 56.6 (Briefing.com consensus: 57.3) from the preliminary reading of 57.3. The final reading for January was 56.4. In the same period a year ago, the index stood at 64.7.
  • The key takeaway from the report is that there were stark differences in sentiment among consumers with stock holdings (large increase in sentiment) and consumers without stock holdings (a decline in sentiment).
• Yield Check:
  • 2-yr: UNCH at 3.47%
  • 3-yr: -1 bp to 3.49%
  • 5-yr: UNCH at 3.65%
  • 10-yr: +2 bps to 4.09%
  • 30-yr: +4 bps to 4.74%

Supreme Court Rules Against Tariffs

• Recent action saw some impulse selling across the curve after the Supreme Court ruled 6-3 against President Trump's tariff policy. The ruling does not necessarily mean that all tariffs will be reversed since the administration is likely to use other avenues to reimpose tariffs. The recent selling was paced by the long end while the 2-yr note has returned to levels seen before the slip to lows.
• Yield Check:
  • 2-yr: UNCH at 3.47%
  • 3-yr: UNCH at 3.50%
  • 5-yr: +1 bp to 3.66%
  • 10-yr: +2 bps to 4.09%
  • 30-yr: +3 bps to 4.73%

Opening Gains Reversed

• U.S. Treasuries have given back their starting gains after the advance reading of Q4 GDP showed below-consensus growth (1.4%; Briefing.com consensus 3.0%) combined with stubborn inflation as the GDP Price Deflator was up 3.6%. On a positive side, the Fed's preferred inflation gauge, the Core PCE Price Index, decelerated to 2.7% from 2.9%, but it was still a bit hotter than the market had expected. The post-data pullback from highs has been paced by the short end while longer tenors hover just below their unchanged levels at this time.
• Yield Check:
  • 2-yr: +1 bp to 3.48%
  • 3-yr: UNCH at 3.50%
  • 5-yr: UNCH at 3.65%
  • 10-yr: UNCH at 4.08%
  • 30-yr: UNCH at 4.71%