Bond Market Update

Rally Extended Despite Weak Start

• U.S. Treasuries continued this week's rally after overcoming some early weakness on a day that was filled with data and market-moving news developments. Treasuries faced pressure out of the gate after overnight reports of renewed Iran-related military activity. The U.S. reportedly carried out strikes, which prompted Iran to send missiles toward the U.S. base that launched the initial strike. The developments briefly lifted the price of oil past $92/bbl and pressured Treasuries. Despite the lower start, the Treasury complex bounced quickly, returning to unchanged after today's big batch of data revealed some softness in the economy combined with stubbornly high inflation. Personal income growth stalled in April while the Fed's preferred inflation gauge—Core PCE—accelerated to 3.3% year-over-year from 3.2%. Separately, business investment spending was down in April, but that was masked by a big jump in civilian aircraft orders, which produced a 7.9% increase in Durable Orders for April (Briefing.com consensus 1.7%). The market also received the second estimate of Q1 GDP, which was reduced to 1.6% from 2.0% due to weaker investment and consumption growth than originally estimated. Treasuries saw another wave of buying interest in the late morning after it was reported that negotiations with Iran have produced a breakthrough. In addition to boosting Treasuries, the report helped equities extend their push into record territory while oil fell back below $90/bbl. The market remained just below session highs after today's $44 bln 7-yr note sale made for a strong finish to this week's note auction slate with the first stop-through in this tenor since December. The U.S. Dollar Index fell 0.2% to 99.01, nearing its 50-day moving average (98.91).
• Yield Check:
  • 2-yr: -1 bp to 4.02%
  • 3-yr: -1 bp to 4.07%
  • 5-yr: -2 bps to 4.16%
  • 10-yr: -3 bps to 4.46%
  • 30-yr: -3 bps to 4.99%

• News:
  • The Atlanta Fed's GDPNow forecast for Q2 GDP was lowered to 3.8% from 4.1% in the latest estimate.
  • The Bank of Korea left its policy rate at 2.50%, as expected, though a couple of rate hikes are being planned for the next six months.
  • Standard & Poor's affirmed Hong Kong's AA+ rating with a Stable outlook.
  • European Central Bank Chief Economist Lane said that secondary effects of inflation will be visible for a while even if the energy shock starts to recede, contributing to the market's view that a rate hike will be announced in June.
  • The EU is looking to tighten limits on duty-free steel imports from China.
  • Hong Kong's April trade deficit reached HKD29.5 bln (last deficit of HKD89.1 bln) as imports grew 44.4% m/m (last 41.2%) and exports rose 42.9% m/m (last 35.8%).
  • Australia's Q1 Building Capital Expenditure were down 3.8% qtr/qtr (last 2.5%), Q1 Private New Capital Expenditure increased 6.5% qtr/qtr (expected 1.2%; last 0.7%, and Q1 Plant/Machinery Capital Expenditure was up 18.1% qtr/qtr (last -1.3%).
  • New Zealand's January Budget deficit reached NZD9.31 bln (last deficit of NZD14.80 bln).
  • Eurozone's May Business and Consumer Survey rose to 93.5 from 93.2 (expected 92.8).
  • France's April PPI was down 2.1% m/m (last 1.9%) but up 2.1% yr/yr (last 0.0%).
  • Italy's May Business Confidence remained at 87.9 (expected 87.5) and Consumer Confidence rose to 93.4 from 90.8 (expected 90.1). April PPI was up 0.3% m/m (last 4.4%), rising 6.8% yr/yr (last 4.2%).
  • Spain's April Retail Sales were up 0.8% yr/yr (last 4.1%).
• Today's Data:
  • Personal income for April decreased slightly, resulting in an unchanged month-over-month reading (Briefing.com consensus 0.5%) after a revised 0.5% increase (from 0.6%) in March. Personal spending rose 0.5% month-over-month (Briefing.com consensus 0.4%) following a revised 1.0% increase (from 0.9%) in March. The PCE Price Index increased 0.4% month-over-month (Briefing.com consensus 0.5%), leaving it up 3.8% yr/yr versus 3.5% in March. The core PCE Price Index rose 0.2% (Briefing.com consensus 0.3%), leaving it up 3.3% yr/yr versus 3.2% in March.
    • The key takeaway from the report is that the lack of income growth combined with an acceleration in the year-over-year core PCE Price Index (to 3.3% from 3.2%) will invite stagflationary concerns, especially if this dynamic continues in the following months.
  • The second estimate of Q1 GDP showed a downward revision to an annual rate of 1.6% (Briefing.com consensus 2.0%) from 2.0% in the advance estimate. The GDP Chain Deflator was revised down to 3.5% (Briefing.com consensus 4.5%) from 3.6% in the advance estimate.
    • The key takeaway from the report is that investment and consumer spending in Q1 were weaker than previously estimated while government spending and the impact of trade were essentially unchanged from the advance estimate.
  • Durable goods orders surged 7.9% month-over-month in April (Briefing.com consensus 1.7%) after increasing a revised 1.1% (from 0.8%) in March. Excluding transportation, orders were up 1.1% month-over-month (Briefing.com consensus 0.5%) following an upwardly revised 1.1% increase (from 0.9%) in March.
    • The key takeaway from the report is that a big increase in aircraft orders from Boeing (BA) fueled the headline increase while nondefense capital goods orders excluding aircraft decreased 1.1%, reflecting some newfound softness in business spending.
  • Initial jobless claims for the week ending May 23 increased by 5,000 to 215,000 (Briefing.com consensus 214,000) from last week's revised reading of 210,000 (from 209,000), while continuing jobless claims for the week ending May 16 rose to 1.786 million from a revised 1.771 million (from 1.782 million) in the prior week.
    • The key takeaway from the report is that even with this increase in initial and continuing claims, the overall level of jobless claims remains relatively low.
  • New home sales decreased 6.2% month-over-month in April to a seasonally adjusted annual rate of 622,000 from a revised 663,000 (from 682,000) in March. On a year-over-year basis, new home sales were down 11.3%.
    • The key takeaway from the report is that the median sales price increased even though the supply (9.4 months) of homes approached this year's high (9.9) from January.
  • $44 bln 7-year Treasury note auction results (prior 12-auction average):
    • High yield: 4.290% (3.994%).
    • Bid-to-cover: 2.52 (2.52).
    • Indirect bid: 78.4% (64.7%).
    • Direct bid: 11.2% (25.1%).
• Commodities:
  • WTI crude: +0.4% to $88.92/bbl
  • Gold: +1.9% to $4532.50/ozt
  • Copper: +1.4% to $6.43/lb
• Currencies:
  • EUR/USD: +0.2% to 1.1647
  • GBP/USD: +0.2% to 1.3440
  • USD/CNH: -0.1% to 6.7732
  • USD/JPY: -0.1% to 159.27
• The Day Ahead:
  • 8:30 ET: May advance International Trade in Goods (prior -$87.9 bln), advance Retail Inventories (prior 0.7%), and advance Wholesale Inventories (prior 1.4%)
  • 9:45 ET: May Chicago PMI (Briefing.com consensus 49.5; prior 49.2)

Auction Reaction

• U.S. Treasuries hover just below highs that were reached in response to mid-morning reports about meaningful progress in U.S.-Iran negotiations. Treasuries attempted a late morning pullback from highs, but the past hour has seen some renewed buying that has returned the complex toward today's highs. The U.S. Treasury just completed this week's note auction slate with a solid sale of $44 bln in 7-yr notes. The offering drew a high yield of 4.290%, which stopped through the when-issued yield by a tenth of a basis point while the bid-to-cover ratio (2.52x) was right in line with average. Indirect takedown (78.4%) was above average (64.7%), reflecting increased interest from foreign investors and central banks.
• Yield Check:
  • 2-yr: -1 bp to 4.02%
  • 3-yr: -2 bps to 4.06%
  • 5-yr: -2 bps to 4.16%
  • 10-yr: -3 bps to 4.45%
  • 30-yr: -3 bps to 4.99%

Treasury Auction Results

• $44 bln 7-year Treasury note auction:
  • Auction results:
    • High yield: 4.290% (When-Issued: 4.291%)
    • Bid-to-cover: 2.52
    • Indirect bid: 78.4%
    • Direct bid: 11.2%
  • Average results of previous 12 auctions:
    • High yield: 3.994%
    • Bid-to-cover: 2.52
    • Indirect bid: 64.7%
    • Direct bid: 25.1%

Treasury Auction Preview

• $44 bln 7-year Treasury note auction (results at 13:00 ET):
  • Prior auction results:
    • High yield: 4.175%
    • Bid-to-cover: 2.51
    • Indirect bid: 64.2%
    • Direct bid: 25.2%
  • Average results of previous 12 auctions:
    • High yield: 3.994%
    • Bid-to-cover: 2.52
    • Indirect bid: 64.7%
    • Direct bid: 25.1%

Early Losses Recovered

• U.S. Treasuries trade in the green after rebounding from their lower start. The trading day started with losses across the curve, but the market bounced in reaction to today's big batch of data, which showed some weakening in the economy with April Personal Income showing no growth (Briefing.com consensus 0.5%) while the core PCE Price Index accelerated to 3.3% from 3.2% in March. The market also received the Durable Orders report for April, which showed a big headline increase (7.9%; Briefing.com consensus 1.7%) that was owed to a spike in nondefense aircraft orders while nondefense capital goods spending excluding aircraft—a proxy for business spending—decreased 1.1%. In addition, Q1 GDP was revised down to 1.6% (Briefing.com consensus 2.0%) from 2.0%. The weak set of data returned Treasuries to little changed while another push to highs took place during the past 30 minutes in response to reports of a breakthrough in U.S.-Iran negotiations.
• Yield Check:
  • 2-yr: -1 bp to 4.02%
  • 3-yr: -1 bp to 4.07%
  • 5-yr: -2 bps to 4.16%
  • 10-yr: -2 bps to 4.46%
  • 30-yr: -2 bps to 4.99%