Bond Market Update

Rebound Extends as Oil Falls

• U.S. Treasuries began the week with a modest extension of their gains from Friday, though the market made little intraday progress past its higher start. Treasuries started the day with modest gains that were assisted by a sharp drop in the price of oil. WTI crude fell past $90/bbl toward $82/bbl after the weekend went by without additional U.S. strikes on Iran, which gave some hope that new diplomatic efforts are being made. There was also an overnight improvement in sentiment surrounding Asian technology stocks, but the optimism faded by the U.S. session resulting in continued volatility in U.S. stocks. As for Treasuries, the 2-yr note began slipping from its higher start shortly after the open while longer tenors resisted but also gave in to some pressure that produced lows in the late morning. The selling followed the release of a Durable Orders report for June (0.3%; Briefing.com consensus 2.0%), which missed headline expectations, but showed continued growth in new orders for nondefense capital goods excluding transportation, which is a proxy for business spending. Treasuries made it back to their opening levels as equities struggled to sustain their starting gains, holding steady after the U.S. Treasury sold $69 bln in 2-yr notes to good demand. The market edged to fresh highs in the early afternoon but dipped back to starting levels with some pressure from a weak $70 bln 5-yr note sale. Crude oil finished near its overnight low while the U.S. Dollar Index faced some pressure before eventually edging up 0.1% to 101.52.
• Yield Check:
  • 2-yr: -1 bp to 4.32%
  • 3-yr: -1 bp to 4.35%
  • 5-yr: -3 bps to 4.40%
  • 10-yr: -4 bps to 4.64%
  • 30-yr: -4 bps to 5.13%

• News:
  • The approval rating of Japan's Prime Minister Takaichi has fallen below 60% for the first time since she took office amid some concerns about long-term debt levels and doubts that the big-boned economic plan will deliver promised results.
  • The Bank of Japan is not expected to announce a rate hike later this week, but it is likely to affirm its commitment to more hikes in the coming months.
  • The Monetary Authority of Singapore tightened its policy unexpectedly.
  • European Central Bank policymaker Kazimir said that a September rate hike is needed even if the outlook improves.
  • The Bank of England is expected to hold its bank rate steady on Thursday, but some hawkishness is the central bank's commentary is expected.
  • China's June Industrial Profit was up 18.7% YTD (last 18.8%).
  • Japan's June Corporate Services Price Index was up 3.2% yr/yr (last 3.4%). May Leading Index rose to 116.5 from 116.1 (expected 116.8).
  • Singapore's June Industrial Production was down 7.2% m/m (last 6.9%) but up 7.2% yr/yr (last 17.8%).
  • Hong Kong's June trade deficit reached HKD52.0 bln (last deficit of HKD44.2 bln) as imports grew 45.4% m/m (last 42.0%) and exports jumped 53.4% m/m (last 40.8%).
  • Eurozone's June Private Sector Loans were up 3.0% yr/yr (expected 3.1%; last 3.0%) and loans to nonfinancials were up 4.0% yr/yr (last 4.0%).
  • Germany's July ifo Business Climate Index rose to 86.6 from 85.7 (expected 86.1). July Business Expectations rose to 86.7 from 84.3 and Current Assessment fell to 86.5 from 87.0. · U.K.'s July CBI Distributive Trades Survey rose to -26 from -54 (expected -45).
• Today's Data:
  • Durable goods orders rose 0.3% month-over-month in June (Briefing.com consensus 2.0%) after an upwardly revised 4.0% decrease (from -4.5%) in May. Excluding transportation, durable goods orders were up 0.6% month-over-month (Briefing.com consensus 0.9%) after increasing an upwardly revised 1.8% (from 1.3%) in May.
    • The key takeaway from the report is that the headline miss masked upward revisions to readings from May and concealed a 0.9% increase in new orders for nondefense capital goods excluding transportation, which is considered a proxy for business spending. On a year-over-year basis, these orders are up 9.3%.
  • $69 bln 2-year Treasury note auction results (prior 12-auction average):
    • High yield: 4.315% (3.726%).
    • Bid-to-cover: 2.66 (2.61).
    • Indirect bid: 56.6% (57.7%).
    • Direct bid: 34.1% (29.9%).
  • $70 bln 5-year Treasury note auction results (prior 12-auction average):
    • High yield: 4.408% (3.822%).
    • Bid-to-cover: 2.28 (2.38).
    • Indirect bid: 59.2% (63.6%).
    • Direct bid: 27.2% (25.0%).
• Commodities:
  • WTI crude: -7.5% to $82.65/bbl
  • Gold: +0.1% to $4076.40/ozt
  • Copper: +0.3% to $6.38/lb
• Currencies:
  • EUR/USD: UNCH at 1.1368
  • GBP/USD: -0.2% to 1.3288
  • USD/CNH: -0.1% to 6.7656
  • USD/JPY: UNCH at 163.77
• The Day Ahead:
  • 8:30 ET: June advance International Trade in Goods (prior -$105.8 bln), advance Retail Inventories (prior 0.6%), and advance Wholesale Inventories (prior 0.3%)
  • 9:00 ET: May FHFA Housing Price Index (Briefing.com consensus 0.0%; prior -0.1%) and May S&P Case-Shiller Home Price Index (Briefing.com consensus 1.3%; prior 1.1%)
  • 10:00 ET: July Consumer Confidence (Briefing.com consensus 92.1; prior 91.2)
• Treasury Auctions:
  • 13:00 ET: $44 bln 7-yr Treasury note auction results

5-Yr Auction Reaction

• U.S. Treasuries have dipped from their midday highs, returning most tenors to their starting levels. The retreat from the day's best levels picked up a bit after today's second auction—a $70 bln 5-yr note sale—met much weaker demand than the earlier 2-yr note offering. The just completed 5-yr sale drew a high yield of 4.408%, tailing the when-issued yield by nearly a basis point while the bid-to-cover ratio (2.28x vs 2.38x average) and indirect takedown (59.2% vs 63.6% average) were below average. The U.S. Treasury will complete this week's quick auction slate with a $44 bln 7-yr note sale tomorrow.
• Yield Check:
  • 2-yr: -1 bp to 4.32%
  • 3-yr: -1 bp to 4.35%
  • 5-yr: -2 bps to 4.40%
  • 10-yr: -3 bps to 4.65%
  • 30-yr: -3 bps to 5.13%

Treasury Auction Results

• $70 bln 5-year Treasury note auction:
  • Auction results:
    • High yield: 4.408% (When-Issued: 4.399%)
    • Bid-to-cover: 2.28
    • Indirect bid: 59.2%
    • Direct bid: 27.2%
  • Average results of previous 12 auctions:
    • High yield: 3.822%
    • Bid-to-cover: 2.38
    • Indirect bid: 63.6%
    • Direct bid: 25.0%

Treasury Auction Preview

• $70 bln 5-year Treasury note auction (results at 13:00 ET):
  • Prior auction results:
    • High yield: 4.200%
    • Bid-to-cover: 2.35
    • Indirect bid: 61.6%
    • Direct bid: 25.5%
  • Average results of previous 12 auctions:
    • High yield: 3.822%
    • Bid-to-cover: 2.38
    • Indirect bid: 63.6%
    • Direct bid: 25.0%

2-Yr Auction Reaction

• Recent action saw the 10-yr note and shorter tenors return to their best levels of the session while the long has also climbed off its low, but it still trades below its opening mark. The U.S. Treasury just completed the first of today's two note auctions with a good result. The $69 bln 2-yr note sale drew a high yield of 4.315%, which stopped through the when-issued yield by half of a basis point. The bid-to-cover ratio (2.66x) was above average (2.61x) while indirect takedown (56.6%) was a bit below average (57.7%). The upcoming $70 bln 5-yr note sale will be completed at 13:00 ET.
• Yield Check:
  • 2-yr: -2 bps to 4.31%
  • 3-yr: -2 bps to 4.34%
  • 5-yr: -3 bps to 4.40%
  • 10-yr: -3 bps to 4.65%
  • 30-yr: -3 bps to 5.13%