Bond Market Update

Flat Finish Masks Volatile Monday

• U.S. Treasuries began the week on a volatile note, starting the session with sharp gains that were mostly reversed as the day went on, resulting in a mostly flat finish. The 10-yr note and shorter tenors lurched to fresh highs for the year at the open after the overnight session featured ongoing strength in the yen and a 12.4% plunge in Japan's Nikkei to levels from early November. This dynamic resulted in forced deleveraging as the yen carry trade became unprofitable. The sharply higher start sent the 2-yr yield to a session low of 3.65% (-22 bps since Friday), just ten basis points above its low from 2023, before a steady intraday pullback lifted the 2-yr yield above last week's close. The 2s10s spread emerged from inversion in the early morning but inverted once again by the close. Equities were not spared from today's volatility with the S&P 500 being down nearly 10.0% from its July peak at today's session low. Meanwhile, the CBOE Volatility Index soared to a high of 65.73, a level that was only seen during the Great Financial Crisis and the coronavirus pandemic, before returning to the 35.00 area. Calls for a 50-bps rate cut in September grew louder, overlooking the fact that a narrowing gap in the interest rate differentials between the U.S. and Japan would put more pressure on the yen carry trade. Crude oil hit its lowest level since early February before narrowing its loss, showing little concern over ongoing geopolitical fears surrounding the Middle East, while the U.S. Dollar Index fell 0.5% to 102.70.
• Yield Check:
  • 2-yr: +1 bp to 3.88%
  • 3-yr: +1 bp to 3.71%
  • 5-yr: +1 bp to 3.63%
  • 10-yr: -1 bp to 3.79%
  • 30-yr: -4 bps to 4.07%

• News:
  • Chicago Fed President (non-voter) Goolsbee said during an appearance on CNBC that the Fed will react if the economy weakens.
  • The EU is on track to approve tariffs on imports of electric vehicles from China, according to FT.
  • China's July Caixin Services PMI hit 52.1 (expected 51.4; last 51.2).
  • Japan's July Services PMI hit 53.7 (expected 53.9; last 49.4).
  • India's July Services PMI hit 60.3 (expected 61.6; last 60.5).
  • Singapore's June Retail Sales were down 3.7% m/m (last 2.4%), falling 0.6% yr/yr (last 2.2%).
  • Hong Kong's July Manufacturing PMI hit 49.5 (last 48.2).
  • Australia's July Services PMI hit 50.4 (expected 50.8; last 51.2). July MI Inflation Gauge was up 0.4% m/m (last 0.3%).
  • Eurozone's June PPI was up 0.5% m/m (expected 0.1%; last -0.2%) but down 3.2% yr/yr (expected -3.3%; last -4.1%). July Services PMI hit 51.9, as expected (last 52.8). August Sentix Investor Confidence fell to -13.9 from -7.3 (expected -5.5).
  • Germany's July Services PMI hit 52.5 (expected 52.0; last 53.1).
  • U.K.'s July Services PMI hit 52.5 (expected 52.4; last 52.1).
  • France's July Services PMI hit 50.1 (expected 50.7; last 49.6).
  • Italy's July Services PMI hit 51.7 (expected 53.0; last 53.7).
  • Spain's July Services PMI hit 53.9 (expected 56.2; last 56.8).
• Today's Data:
  • The ISM Non-Manufacturing Index rose to 51.4% in July (Briefing.com consensus 51.3%) from 48.8% in June. The dividing line between expansion and contraction is 50.0%, so the July reading reflects services sector activity expanding after two contractions over the previous three months.
    • The key takeaway from the report is that overall activity in the largest sector of the U.S. economy rebounded strongly with Indices for Business Activity and Employment jumping back into expansionary territory after contracting in June.
  • The S&P Global U.S. Services PMI hit 55.0 in the final reading for July, down from 56.0 in the preliminary reading and 55.3 in the final reading for June.
  • The Federal Reserve's Senior Loan Officer survey showed that standards for commercial and industrial loans tightened while demand remained stable in Q2. Lending standards for household loans were unchanged while demand weakened across all categories. Lending standards for credit card and other loans tightened while standard for auto loans were little changed. Meanwhile, demand for auto and other consumer loans weakened but held steady for credit card loans.
• Commodities:
  • WTI crude: -0.7% to $73.08/bbl
  • Gold: -1.2% to $2440.20/ozt
  • Copper: -2.7% to $3.99/lb
• Currencies:
  • EUR/USD: +0.4% to 1.0953
  • GBP/USD: -0.3% to 1.2764
  • USD/CNH: -0.4% to 7.1335
  • USD/JPY: -1.9% to 143.76
• The Day Ahead:
  • 8:30 ET: June Trade Balance (Briefing.com consensus -$72.8 bln; prior -$75.1 bln)
• Treasury Auctions:
  • 13:00 ET: $58 bln 3-yr Treasury note auction results