Bond Market Update

Rates Take a Dip

• U.S. Treasuries saw a modest pullback in the overnight trade as President Trump's pronouncement of a ceasefire between Israel and Iran took away some of the safe-haven premium. Buyers soon returned, though, in the wake of a consumer confidence report for June that was weaker than expected and showed a drop in average 12-month inflation expectations from 6.4% to 6.0%. Treasuries remained bid, for the most part, over the remainder of the cash session, digesting the $69 billion 2-yr note sale and drawing support from the inflation-friendly drop in oil prices and an even-keeled Fed Chair Powell, who told the House Financial Services Committee that many paths are possible, one of which is that inflation could be cooler than expected, which would suggest the Fed could cut sooner. The U.S. Dollar Index declined 0.5% to 97.89.
• Yield Check:
  • 2-yr: -2 bps to 3.81%
  • 3-yr: -2 bps to 3.76%
  • 5-yr: -3 bps to 3.86%
  • 10-yr: -2 bps to 4.30%
  • 30-yr: -2 bps to 4.84%

• News:
  • President Trump says "Israel is not going to attack Iran. All planes will turn around and head home, while doing a friendly “Plane Wave” to Iran. Nobody will be hurt, the ceasefire is in effect! Thank you for your attention to this matter!"
  • Fed Chair Powell says "Many paths are possible. Inflation could be cooler than expected, which would suggest the Fed could cut sooner. On the other hand, if inflation picks up, rate cuts can come later."
  • Senate nearing agreement with House on $40,000 state and local tax deduction cap with lower income threshold, according to Axios
  • Senate Republicans still have disagreements on Medicaid and deficits ahead of Senate vote this week on large reconciliation bill, according to WSJ
  • Senate Majority Leader John Thune expects first procedural vote on large reconciliation bill on Friday and final votes over the weekend, according to Axios
  • President Trump says he doesn't want anyone in Congress to leave for July 4th recess until large reconciliation bill is passed
  • U.S. struggling to secure trade agreements with various partners ahead of July 9 deadline, according to Bloomberg
  • EU preparing retaliatory tariffs in order to get a better trade deal with the Trump administration, according to FT
  • Early intelligence shows that Iran strikes did not destroy nuclear sites and set the Iranian nuclear program back by months; White House says this assessment "is flat-out wrong," according to CNN
  • Atlanta Fed President Raphael Bostic (not a voting FOMC member) in an interview says Fed should wait to lower rates, according to Reuters
  • Central banks considering more gold, euro, and yuan reserves, according to Reuters
  • Supreme Court allows the Trump administration to deport illegal immigrants to countries where they are not citizens, according to Washington Post
  • ECB policymaker Villeroy de Galhau said that the ECB may still cut rates over the next six months despite a volatile price of oil
  • Germany's June ifo Business Climate Index 88.4 (expected 88.1; last 87.5)
• Today's Data:
  • The Q1 Current Account Deficit widened to $450.2 billion from a downwardly revised $312.0 billion (from -$303.9 billion) in the fourth quarter.
  • April FHFA Housing Price Index (Actual -0.4%; Briefing.com consensus 0.0%; prior revised to 0.0% from -0.1%).
  • April S&P Case-Shiller Home Price Index (Actual 3.4%; Briefing.com consensus 4.1%; prior 4.1%).
  • The Conference Board's Consumer Confidence Index slumped to 93.0 in June (Briefing.com consensus 99.0) from an upwardly revised 98.4 (from 98.0) in May. In the same period a year ago, the index stood at 97.8.
    • The key takeaway from the report is that consumers were less positive about business conditions and job availability, which is a perception that could lead to reduced discretionary spending activity.
  • The $69 bln 2-yr note auction saw a high yield of 3.786% that just about stopped on the screws of the when-issued yield of 3.787%.
• Commodities:
  • WTI crude: -6.1% to $64.46/bbl
  • Gold: -1.8% to $3334.70/ozt
  • Copper: +0.4% to $4.87/lb
• Currencies:
  • EUR/USD: +0.4% to 1.1619
  • GBP/USD: +0.9% to 1.3625
  • USD/CNH: -0.2% to 7.1633
  • USD/JPY: -1.0% to 144.71
• The Day Ahead:
  • 07:00 ET: MBA Mortgage Applications Index (prior -2.6%)
  • 10:00 ET: May New Home Sales (Briefing.com consensus: 700K; prior 743K)
  • 10:00 ET: Fed Chair Powell's Semiannual Monetary Policy Report before Senate Banking Committee
  • 10:30 ET: EIA Crude Oil Inventories (prior -11.47M)
  • 13:00 ET: $70 bln 5-yr note auction

Treasury Auction Results

• $69 bln 2-year Treasury note auction:
  • Auction results:
    • High yield: 3.786% (When-Issued: 3.787%)
    • Bid-to-cover: 2.58
    • Indirect bid: 60.5%
    • Direct bid: 26.3%
  • Average results of previous 12 auctions:
    • High yield: 4.116%
    • Bid-to-cover: 2.65
    • Indirect bid: 69.7%
    • Direct bid: 18.5%

• Yield check:
  • 2-yr: -2 bps to 3.81%
  • 3-yr: -2 bps to 3.76%
  • 5-yr: -3 bps to 3.86%
  • 10-yr: -3 bps to 4.29%
  • 30-yr: -3 bps to 4.86%

Treasury Auction Preview

• $69 bln 2-year Treasury note auction (results at 13:00 ET):
  • Prior auction results:
    • High yield: 3.955%
    • Bid-to-cover: 2.57
    • Indirect bid: 63.3%
    • Direct bid: 26.2%
  • Average results of previous 12 auctions:
    • High yield: 4.116%
    • Bid-to-cover: 2.65
    • Indirect bid: 69.7%
    • Direct bid: 18.5%

• Yield check:
  • 2-yr:  unch at 3.83%
  • 3-yr: -1 bp to 3.77
  • 5-yr: -2 bps to 3.87%
  • 10-yr: -1 bp to 4.32%
  • 30-yr: -1 bp to 4.86%

Data Recon

• The Conference Board's Consumer Confidence Index slumped to 93.0 in June (Briefing.com consensus 99.0) from an upwardly revised 98.4 (from 98.0) in May. In the same period a year ago, the index stood at 97.8.
  • The key takeaway from the report is that consumers were less positive about business conditions and job availability, which is a perception that could lead to reduced discretionary spending activity.
    • The Present Situation Index fell from 135.5 to 129.1.
    • The Expectations Index dropped from 73.6 to 69.0, sticking below the threshold of 80 that typically signals recession ahead.
    • Average 12-month inflation expectations decreased from 6.4% to 6.0%.
• The Q1 Current Account Deficit widened to $450.2 billion from a downwardly revised $312.0 billion (from -$303.9 billion) in the fourth quarter.
• Yield check:
  • 2-yr: -1 bp to 3.82%
  • 3-yr: -1 bp to 3.77%
  • 5-yr: -2 bps to 3.87%
  • 10-yr: unch at 4.32%
  • 30-yr: unch at 4.86%

Geopolitical Angst Calms Down

• U.S. Treasuries are a bit softer across the curve and less anxious-looking after President Trump announced a ceasefire between Israel and Iran. That news has prompted a further decline in oil prices, which fell sharply yesterday after Iran staged a weak-handed response to the U.S. destroying three of its nuclear facilities. WTI crude futures are currently down 3.8% to $65.92/bbl after topping $78.00/bbl yesterday. That is a positive move insofar as inflation pressures are concerned. Today's session will feature the June Consumer Confidence report at 10:00 a.m. ET and a $69 billion 2-yr note auction at 1:00 p.m. ET. The focal point, however, will be Fed Chair Powell's semiannual monetary policy report to Congress, slated for 10:00 a.m. ET, and the Q&A period that follows. The Fed Chair will face questions about why the Fed hasn't cut rates since December and when it expects to cut rates next.
• Yield Check:
  • 2-yr: +1 bp to 3.84%
  • 3-yr: +1 bp to 3.79%
  • 5-yr: +1 bp to 3.90%
  • 10-yr: +2 bps to 4.34%
  • 30-yr: +3 bps to 4.89%

• News:
  • President Trump says "Israel is not going to attack Iran. All planes will turn around and head home, while doing a friendly “Plane Wave” to Iran. Nobody will be hurt, the ceasefire is in effect! Thank you for your attention to this matter!"
  • Senate nearing agreement with House on $40,000 state and local tax deduction cap with lower income threshold, according to Axios
  • U.S. struggling to secure trade agreements with various partners ahead of July 9 deadline, according to Bloomberg
  • Atlanta Fed President Raphael Bostic (not a voting FOMC member) in an interview says Fed should wait to lower rates, according to Reuters
  • Central banks considering more gold, euro, and yuan reserves, according to Reuters
  • Supreme Court allows the Trump administration to deport illegal immigrants to countries where they are not citizens, according to Washington Post
  • ECB policymaker Villeroy de Galhau said that the ECB may still cut rates over the next six months despite a volatile price of oil
  • Germany's June ifo Business Climate Index 88.4 (expected 88.1; last 87.5)
• Commodities:
  • WTI crude: -3.6% to $66.06/bbl
  • Gold: -1.7% to $3336.20/ozt
  • Copper: +1.1% to $4.90/lb
• Currencies:
  • EUR/USD: +0.3% to 1.1607
  • GBP/USD: +0.8% to 1.3619
  • USD/CNH: flat at 7.1735
  • USD/JPY: -0.9% to 144.90
• The Day Ahead:
  • 08:30 ET: Q1 Current Account Balance (prior -$303.9B)
  • 09:00 ET: April FHFA Housing Price Index (Briefing.com consensus 0.0%; prior -0.1%)
  • 09:00 ET: April S&P Case-Shiller Home Price Index (Briefing.com consensus 4.1%; prior 4.1%)
  • 10:00 ET: Fed Chair Powell's Semiannual Monetary Policy Report before House Financial Services Committee
  • 10:00 ET: June Consumer Confidence (Briefing.com consensus 99.0; prior 98.0)
  • 13:00 ET: $69 bln 2-yr note auction