Bond Market Update

Boosted by Emergence of Discount AI

• U.S. Treasuries started the week on a firmly higher note with the market seeing an element of flight to safety driven by a sudden concern that the AI-sector dominance of U.S. companies could be in jeopardy. An open source AI model called DeepSeek, which has been developed by a Chinese start-up, quickly garnered popularity over the weekend. Markets took note because of a two-fold claim that training DeepSeek was significantly cheaper than what has been spent on other major models like ChatGPT and that the model did not require top-of-the-line hardware. This invited questions about confidence in demand forecasts for the likes of NVIDIA (NVDA) and Micron (MU) and it also put a spotlight on the value that big tech companies are getting out of their behemoth capital expenditure budgets. Altogether, these concerns weighed on risk sentiment, which in turn boosted Treasuries and other sovereign debt. The rally in Treasuries sent yields past their lows from last week with yields on the 5-yr note and shorter tenors hitting fresh lows for January while yields on longer tenors approached their lows from the start of the month. Morning trade saw some narrowing of the initial gains, but the market made it back to the day's highs by the end of the session, assisted by today's pair of Treasury note auctions. A $69 bln 2-yr note sale, which met tepid demand and a $70 bln 5-yr note offering that garnered stronger interest than the 2-yr sale. Crude oil deepened its reversal from its January high while the U.S. Dollar Index slipped 0.1% to 107.35.
• Yield Check:
  • 2-yr: -8 bps to 4.19%
  • 3-yr: -9 bps to 4.24%
  • 5-yr: -10 bps to 4.33%
  • 10-yr: -10 bps to 4.53%
  • 30-yr: -8 bps to 4.77%

• News:
  • President Trump threatened to impose tariffs and other punitive measures on Colombia after the South American country refused to allow deportation flights from the U.S. However, the threats made by President Trump prompted Colombia's president to agree to a resumption of these flights.
  • Bank of Japan Governor Ueda said that there is no preset idea regarding future rate adjustments and that the neutral rate is a long way from being achieved.
  • European Central Bank President Lagarde complained that maintaining price stability could be more difficult due to increased volatility.
  • Japan's November Leading Index fell to 107.5 from 109.1 (expected 107.0) and Coincident Indicator was down 1.4% m/m (expected -1.5%; last 2.8%).
  • Hong Kong's December trade deficit reached $34.5 bln (last deficit of $43.4 bln) as imports fell 1.1% m/m (last 5.7%) and exports rose 5.2% m/m (last 2.1%).
  • China's January Manufacturing PMI hit 49.1 (expected 50.1; last 50.1) and Non-Manufacturing PMI hit 50.2 (last 52.2).
  • Singapore's Q4 Unemployment Rate 1.9% (last 1.9%).
  • Germany's January ifo Business Climate Index hit 85.1 (expected 84.9; last 84.7). January Current Assessment hit 86.1 (expected 85.4; last 85.1) and Business Expectations hit 84.2 (expected 84.2; last 84.4).
  • France's December jobseekers increased to 2.957 mln from 2.935 mln.
• Today's Data:
  • New home sales increased 3.6% month-over-month in December to a seasonally adjusted annual rate of 698,000 units (Briefing.com consensus 680,000) from an upwardly revised 674,000 (from 664,000) in November. On a year-over-year basis, new home sales were up 6.7%.
    • The key takeaway from the report is that new home sales growth was ahead of expectations in December, but selling prices jumped from the bottom of the range that was seen in 2024 toward the top, which presents a headwind to selling activity going forward.
  • $69 bln 2-year Treasury note auction results (prior 12-auction average):
    • High yield: 4.211% (4.395%).
    • Bid-to-cover: 2.66 (2.63).
    • Indirect bid: 65.0% (67.6%).
    • Direct bid: 21.3% (19.1%).
  • $70 bln 5-year Treasury note auction results (prior 12-auction average):
    • High yield: 4.330% (4.188%).
    • Bid-to-cover: 2.40 (2.38).
    • Indirect bid: 62.8% (67.5%).
    • Direct bid: 26.1% (17.9%).
• Commodities:
  • WTI crude: -1.9% to $73.15/bbl
  • Gold: -1.4% to $2739.50/ozt
  • Copper: -2.1% to $4.23/lb
• Currencies:
  • EUR/USD: UNCH at 1.0490
  • GBP/USD: +0.1% to 1.2488
  • USD/CNH: +0.1% to 7.2512
  • USD/JPY: -0.9% to 154.55
• The Day Ahead:
  • 8:30 ET: December Durable Orders (Briefing.com consensus 0.4%; prior -1.1%) and Durable Orders ex-transport (Briefing.com consensus 0.5%; prior -0.1%)
  • 9:00 ET: November FHFA Housing Price Index (prior 0.4%) and November S&P Case-Shiller Home Price Index (Briefing.com consensus 4.2%; prior 4.2%)
  • 10:00 ET: January Consumer Confidence (Briefing.com consensus 108.1; prior 104.7)
• Treasury Auctions:
  • 13:00 ET: $44 bln 7-yr Treasury note auction results