Bond Market Update

2s30s Spread Emerges From Inversion

• U.S. Treasuries had a mixed showing on Wednesday, as the 2-yr note recorded a solid gain while the long bond underperformed throughout the day, falling to a three-week low. The 2-yr note outperformed from the start after a night that saw the release of more flash July PMI readings from major economies. Japan's Manufacturing PMI (49.2) fell into contraction in the flash reading for July while Services PMI (53.9) pointed to renewed expansion. Elsewhere, flash July Manufacturing (45.6) and Services PMI (51.9) readings for the eurozone weakened unexpectedly from their June levels, largely due to a deepening contraction in both economic sectors in Germany. The 10-yr note and shorter tenors added to their gains during the first three hours of action with some help from a disappointing New Home Sales report for June (617,000; Briefing.com consensus 640,000). The long bond, meanwhile, underperformed from the start, finding resistance near its opening levels. Late-morning trade saw selling across the curve with the long bond pacing the weakness. The pressure persisted into the afternoon with 5s and longer tenors sliding to fresh lows after a poorly received 5-yr note sale. Today's retreat sent the 30-yr yield back above its 50-day (4.497%) and 200-day (4.495%) moving averages to a three-week high while the 2-yr yield slipped to a fresh low for the month. As a result, the 2s30s spread expanded by 14 basis points to 13 basis points, emerging from an inversion that has been in place since late January. Crude oil inched up off its lowest level in more than six weeks while the U.S. Dollar Index slipped 0.1% to 104.40.
• Yield Check:
  • 2-yr: -6 bps to 4.42%
  • 3-yr: -1 bp to 4.25%
  • 5-yr: +1 bp to 4.16%
  • 10-yr: +5 bps to 4.29%
  • 30-yr: +8 bps to 4.55%

• News:
  • The Atlanta Fed's GDPNow forecast for Q2 GDP was lowered to 2.6% from 2.7% in the previous estimate.
  • Bank of Canada lowered its policy rate by 25 bps to 4.50%.
  • French President Macron ruled out resigning before the end of his term in 2027.
  • Hungary's central bank lowered its base rate by 25 bps to 6.75%.
  • Deutsche Bank (DB) reported its first quarterly loss in four years.
  • Japan's flash July Manufacturing PMI hit 49.2 (expected 50.5; last 50.0) and flash Services PMI hit 53.9 (last 49.4).
  • South Korea's July Consumer Confidence rose to 103.6 from 100.9.
  • India's flash July Manufacturing PMI hit 58.5 (last 58.3) and flash Services PMI hit 61.1 (last 60.5).
  • Australia's flash July Manufacturing PMI hit 47.4 (last 47.2) and flash Services PMI hit 50.8 (last 51.2).
  • Eurozone's flash July Manufacturing PMI hit 45.6 (expected 46.0; last 45.8) and flash Services PMI hit 51.9 (expected 52.9; last 52.8).
  • Germany's flash July Manufacturing PMI hit 42.6 (expected 44.1; last 43.5) and flash Services PMI hit 52.0 (expected 53.2; last 53.1). August GfK Consumer Climate improved to -18.4 from -21.6 (expected -21.1).
  • U.K.'s flash July Manufacturing PMI hit 51.8 (expected 51.1; last 50.9) and flash Services PMI hit 52.4 (expected 52.5; last 52.1). 
  • France's flash July Manufacturing PMI hit 44.1 (expected 45.8; last 45.4) and flash Services PMI hit 50.7 (expected 49.7; last 49.6).
  • Spain's June PPI was down 3.5% yr/yr (last -4.5%) and June Consumer Confidence rose to 88.4 from 83.8.
• Today's Data:
  • New home sales declined 0.6% month-over-month in June to a seasonally adjusted annual rate of 617,000 units (Briefing.com consensus 640,000) from an upwardly revised 621,000 (from 619,000) in May. On a year-over-year basis, new home sales were down 7.4%.
    • The key takeaway from the report is that new home sales activity remained soft in June, pressured by a lack of lower-priced homes and affordability pressures stemming from the persistence of high mortgage rates and higher selling prices.
  • The advance goods trade deficit narrowed to $96.8 bln in June from $99.4 bln in May.
  • Advance Retail Inventories rose 0.7% in June after increasing a revised 0.6% (from 0.7%) in May.
  • Advance Wholesale Inventories increased 0.2% in June after increasing 0.6% in May.
  • The weekly MBA Mortgage Index fell 2.2% to follow last week's 3.9% increase. The Purchase Index was down 4.0% while the Refinance Index rose 0.3%.
  • Crude oil inventories decreased by 3.74 mln barrels after decreasing by 4.87 mln barrels a week ago.
  • $70 bln 5-year Treasury note auction results (prior 12-auction average):
    • High yield: 4.121% (4.375%).
    • Bid-to-cover: 2.40 (2.43).
    • Indirect bid: 67.2% (66.3%).
    • Direct bid: 18.8% (18.2%).
• Commodities:
  • WTI crude: +0.7% to $77.55/bbl
  • Gold: +0.4% to $2416.60/ozt
  • Copper: -1.2% to $4.11/lb
• Currencies:
  • EUR/USD: -0.2% to 1.0836
  • GBP/USD: -0.1% to 1.2902
  • USD/CNH: -0.3% to 7.2688
  • USD/JPY: -1.0% to 154.08
• The Day Ahead:
  • 8:30 ET: Advance Q2 GDP (Briefing.com consensus 1.9%; prior 1.4%), Advance Q2 GDP Deflator (Briefing.com consensus 2.6%; prior 3.1%), weekly Initial Claims (Briefing.com consensus 240,000; prior 243,000), Continuing Claims (prior 1.867 mln), June Durable Orders (Briefing.com consensus 0.4%; prior 0.1%), and Durable Orders ex-transport (Briefing.com consensus 0.2%; prior -0.1%)
  • 10:30 ET: Weekly natural gas inventories (prior +10 bcf)
• Treasury Auctions:
  • 13:00 ET: $44 bln 7-yr Treasury note auction results