Bond Market Update

Longer Tenors Extend Post-FOMC Losses

• U.S. Treasuries ended Thursday on a mixed note with the 5-yr note and longer tenors adding to their losses from Wednesday while the short end outperformed, keeping the 2-yr yield just below its November high (4.393%) and its 200-day moving average (4.373%). The divergence was on display from the start after a night that featured several central bank policy announcements. The Bank of Japan maintained its policy rate at 0.25% against some expectations for a 25-basis point increase while the Hong Kong Monetary Authority followed yesterday's rate cut by the FOMC with a 25-basis point decrease of its own (to 4.75%). Elsewhere, the Bank of England and Norway's Norges Bank left their respective policy rates at 4.75% and 4.50% while Sweden's Riksbank announced a 25-basis point cut to 2.50%. There was also some attention on Washington, where Congress attempted to push through a short-term funding deal to avoid a shutdown going into the weekend, but the attempt met resistance from the incoming administration with President-elect Trump saying that a shutdown will take place if the debt ceiling is not extender or eliminated. The lower start in longer tenors was followed by slow, but steady, additional selling into the afternoon, assisted by the release of a batch of better-than-expected economic data. The final 90 minutes of action saw a shallow rebound that took place after the 10-yr yield was lifted toward its May high (4.638%) with this year's high from April (4.737%) looming not far above. However, the shallow rebound did not prevent longer tenors from finishing with sharp losses, restraining the equity market's ability to stage a bounce. Crude oil gave back its intraday gain after a brief rise above its 50-day moving average (69.96) while the U.S. Dollar Index rose 0.3% to 108.38, reaching its highest level since November 2022.
• Yield Check:
  • 2-yr: -3 bps to 4.32%
  • 3-yr: UNCH at 4.34%
  • 5-yr: +5 bps to 4.43%
  • 10-yr: +8 bps to 4.57%
  • 30-yr: +8 bps to 4.74%

• News:
  • The New York Fed announced that its repurchase facility will conduct additional operations between December 30 and January 3.
  • Sweden's Riksbank lowered its policy rate by 25 basis points to 2.50%, lowered its 2025 growth forecast to 1.8% from 1.9%, and hinted at another rate cut during the first half of next year.
  • Norway's Norges Bank left its policy rate at 4.50% and raised its domestic growth forecasts for 2025 (to 1.1% from 1.4%) and 2026 (to 1.4% from 1.3%) while the CPI outlook for 2025 was reduced to 2.7% from 3.0% and the forecast for 2026 was lowered to 2.7% from 2.8%.
  • Mortgage rates in China increased for the first time since 2021 due to falling margins.
  • The People's Bank of China could alter its loan prime rate tomorrow.
  • Australia's December MI Inflation Expectations increased to 4.2% from 3.8%.
  • New Zealand's Q3 GDP contracted 1.0% qtr/qtr (expected -0.2%; last -1.1%), decreasing 1.5% yr/yr (expected -0.4%; last -0.5%). New Zealand's December ANZ Business Confidence fell to 62.3 from 64.9.
  • Eurozone's October Current Account surplus reached EUR25.8 bln (expected surplus of EUR33.5 bln; last surplus of EUR38.8 bln).
  • Germany's January GfK Consumer Climate rose to -21.3 from -23.1 (expected -22.6).
  • France's December Business Survey remained at 97 (expected 96).
  • Swiss November trade surplus reached CHF5.424 bln (expected CHF6.200 bln; last CHF8.025 bln).
  • Spain's October trade deficit reached EUR3.93 bln (last deficit of EUR3.30 bln). November Consumer Confidence rose to 80.6 from 79.6.
• Today's Data:
  • Initial jobless claims for the week ending December 14 decreased 22,000 to 220,000 (Briefing.com consensus 237,000). Continuing jobless claims for the week ending December 7 decreased 5,000 to 1.874 million.
    • The key takeaway from the report is the low level of initial jobless claims, which connotes a reluctance on the part of employers to layoff staff.
  • The third estimate for Q3 GDP included an upward revision to 3.1% (Briefing.com consensus 2.8%) from the second estimate of 2.8%. The GDP Deflator was left unchanged at 1.9%, as expected.
    • The key takeaway from the report is that it is dated (we're less than two weeks away from the end of the fourth quarter); however, the report speaks to the enduring -- and surprising -- strength of the U.S. economy despite the Fed raising rates 12 times between March 2022 and July 2023.
  • The December Philadelphia Fed Index checked in at -16.4 (Briefing.com consensus 3.0) following a -5.5 reading for November. The line between expansion and contraction for this series is 0.0.
    • The key takeaway from the report is that manufacturing activity in the Philadelphia Fed region contracted in December at a faster pace than the prior month.
  • Existing home sales increased 4.8% month-over-month in November to a seasonally adjusted annual rate of 4.15 million (Briefing.com consensus 4.10 million) from an unrevised 3.96 million in October. Sales were up 6.1% from the same period a year ago, which was the largest increase since June 2021.
    • The key takeaway from the report is that it shows how lower mortgage rates can move the needle on existing home sales given the pent-up demand; however, with mortgage rates having risen noticeably again, expectations for continuing strength in existing home sales will be tempered by affordability concerns.
  • Conference Board's Leading Index was up 0.3% in November (Briefing.com consensus -0.1%) after decreasing 0.4% in October.
  • Weekly natural gas inventories decreased by 125 bcf after decreasing by 190 bcf a week ago.
• Commodities:
  • WTI crude: -0.8% to $69.38/bbl
  • Gold: -1.7% to $2608.10/ozt
  • Copper: -1.9% to $4.08/lb
• Currencies:
  • EUR/USD: +0.1% to 1.0364
  • GBP/USD: -0.5% to 1.2504
  • USD/CNH: -0.2% to 7.3096
  • USD/JPY: +1.7% to 157.36
• The Day Ahead: 
  • 8:30 ET: November Personal Income (Briefing.com consensus 0.4%: prior 0.6%), Personal Spending (Briefing.com consensus 0.5%; prior 0.4%), PCE Prices (Briefing.com consensus 0.2%; prior 0.2%), and Core PCE Prices (Briefing.com consensus 0.2%; prior 0.3%)
  • 10:00 ET: Final December University of Michigan Consumer Sentiment (Briefing.com consensus 74.2; prior 74.0)