Bond Market Update

Longer Tenors Lead Midweek Dip

• U.S. Treasuries retreated on Wednesday after failing to put on another show of intraday resilience. The trading day started in the same fashion as the past two sessions with the market facing some early pressure after a night that featured reports of new policy stimulus. The People's Bank of China followed yesterday's string of policy changes with a 30-basis point reduction to its medium-term lending facility rate while Sweden's central bank announced a 25-bps rate cut. Treasuries climbed off their opening levels during the first few minutes of action, but they found resistance in short order. The market returned to the day's starting levels about 90 minutes after the cash open, slipping to fresh lows in the early afternoon. The retreat developed at a slow pace with longer tenors marking lows shortly after the completion of today's $70 bln 5-yr note auction, which was received well, pricing right on the screws, which was also the case with yesterday's 2-yr note offering. Today, the 2-yr note outperformed again, expanding the 2s10s spread by four basis points to 23 basis points. Crude oil fell to its lowest level in more than a week while the U.S. Dollar Index rose 0.4% to 100.88 after bouncing just above its September low (100.22).
• Yield Check:
  • 2-yr: UNCH at 3.55%
  • 3-yr: +1 bp to 3.49%
  • 5-yr: +4 bps to 3.52%
  • 10-yr: +5 bps to 3.78%
  • 30-yr: +5 bps to 4.13%

• News:
  • European Central Bank policymaker Knot said that the ECB is likely to continue easing through the first half of next year.
  • European Central Bank policymaker Nagel said that Germany's economy will eventually improve, though major reforms are still needed.
  • Riksbank lowered its policy rate by 25 basis points to 3.25% and hinted at a faster pace of easing in the coming months. · Spain is maintaining its target for a 2.5% deficit in 2025.
  • Car dealers in China are struggling with high inventories and weak demand.
  • The People's Bank of China lowered its medium-term lending facility rate by 30 basis points to 2.00%.
  • Standard & Poor's affirmed Australia's AAA rating with a Stable outlook.
  • Japan's September Corporate Services Price Index was up 2.7% yr/yr (expected 2.6%; last 2.7%) and July BoJ Core CPI was up 1.8% yr/yr, as expected (last 1.8%).
  • South Korea's September Consumer Confidence fell to 100.0 from 100.8.
  • Australia's August CPI was up 2.7%, as expected (last 3.5%).
  • France's September Consumer Confidence rose to 95 from 93 (expected 92).
  • Spain's August PPI was down 1.3% yr/yr (last -1.6%). · Swiss September ZEW Expectations fell to -8.8 from -3.4.
• Today's Data:
  • New home sales declined 4.7% month-over-month in August to a seasonally adjusted annual rate of 716,000 units (Briefing.com consensus 695,000) from an upwardly revised 751,000 (from 739,000) in July. On a year-over-year basis, new home sales were up 9.8%.
    • The key takeaway from the report is that new home sales, which are tabulated when contracts are signed, were better than expected in August, aided by lower pricing and sliding mortgage rates. Notably, the South was the only region that saw a pickup in sales month-to-month.
  • The weekly MBA Mortgage Index rose 11.0% after increasing 14.2% a week ago. The Refinance Index was up 11.0% while the Purchase Index was up 1.4%.
  • Weekly crude oil inventories decreased by 4.47 mln barrels after decreasing by 1.63 mln barrels a week ago. 
  • $70 bln 5-year Treasury note auction results (prior 12-auction average):
    • High yield: 3.519% (4.308%).
    • Bid-to-cover: 2.38 (2.40).
    • Indirect bid: 70.3% (66.7%).
    • Direct bid: 18.2% (17.7%).
• Commodities:
  • WTI crude: -2.5% to $69.78/bbl
  • Gold: +0.5% to $2685.80/ozt
  • Copper: UNCH at $4.49/lb
• Currencies:
  • EUR/USD: -0.4% to 1.1134 
  • GBP/USD: -0.7% to 1.3321
  • USD/CNH: +0.3% to 7.0328
  • USD/JPY: +1.1% to 144.70
• The Day Ahead:
  • 8:30 ET: Q2 GDP -- third estimate (Briefing.com consensus 3.0%; prior 3.0%), Q2 GDP Deflator -- third estimate (Briefing.com consensus 2.5%; prior 2.5%), August Durable Orders (Briefing.com consensus -2.9%; prior 9.9%), Durable Orders ex-transportation (Briefing.com consensus 0.1%; prior -0.2%), weekly Initial Claims (Briefing.com consensus 224,000; prior 219,000), and Continuing Claims (prior 1.829 mln)
  • 10:00 ET: August Pending Home Sales (Briefing.com consensus 1.0%; prior -5.5%) 
  • 10:30 ET: Weekly natural gas inventories (prior +58 bcf)
• Treasury Auctions:
  • 13:00 ET: $44 bln 7-yr Treasury note auction results