Bond Market Update

Inflation Jitters Keep Treasuries Pressured

• U.S. Treasuries retreated on Tuesday with longer tenors pacing a slide that lifted the 30-yr yield to its highest level since November 2023 while the 10-yr yield hit its highest level since April. Treasuries struggled from the cash start with the 3-yr note lagging after a night that featured news of accelerating grocery inflation in the U.K. and rising political and economic tensions with China after the U.S. added technology company Tencent and battery maker CATL to a list of entities cooperating with the Chinese military. Treasuries ranged near their opening levels through the first 90 minutes of action, widening their losses after the market received a pair of economic reports that weighed on the market's rate cut expectations. The ISM Services report for December (54.1%; Briefing.com consensus 53.0%; prior 52.1%) showed a big jump in the Prices Index (to 64.4 from 58.2) while the JOLTS report for November revealed an uptick in job openings (to 8.098 mln from 7.839 mln). This combination pointed to ongoing strength in the U.S. economy and invited renewed concerns about inflation, which weakens the argument for another rate cut in the immediate term. Accordingly, the implied likelihood of a rate cut in March fell to just 39.1% from 46.7% yesterday while expectations for a May cut decreased to 48.6% from yesterday's 54.5%. Treasuries reached lows about 90 minutes later with the 5-yr note and shorter tenors rising off their lows as the day went on while longer tenors remained much closer to their lows. Today's $39 bln 10-yr note reopening met soft demand, keeping longer tenors near their lows while shorter tenors slipped from highs into the afternoon. Crude oil reclaimed its loss from Monday while the U.S. Dollar Index rose 0.2% to 108.52 after bouncing off Monday's low.
• Yield Check:
  • 2-yr: +3 bps to 4.30%
  • 3-yr: +5 bps to 4.36%
  • 5-yr: +4 bps to 4.47%
  • 10-yr: +7 bps to 4.68%
  • 30-yr: +7 bps to 4.91%

• News:
  • The Atlanta Fed's GDPNow forecast for Q4 GDP was increased to 2.7% from 2.4% in the previous estimate.
  • President-elect Trump said that he will reverse the Biden administration's ban on offshore drilling.
  • The EU Council expects that the National Recovery and Resilience Plan will increase Italy's GDP by 1.4 percentage points by the end of 2026.
  • Grocery inflation in the U.K. accelerated to 3.7% in December from 2.6% in November, according to a survey conducted by Kantar.
  • Chinese officials are expected to announce a trade-in program for consumer goods on Wednesday to boost demand.
  • Japan's Finance Minister Kato spoke again about the foreign exchange market, saying that one-sided and sudden moves are being seen.
  • Eurozone's Flash December CPI was up 0.4% m/m (last -0.3%), rising 2.4% yr/yr, as expected (last 2.2%). Flash December Core CPI was up 0.5% m/m (last -0.6%), rising 2.7% yr/yr, as expected (last 2.7%). November Unemployment Rate remained at 6.3%, as expected.
  • U.K.'s December Halifax House Price Index was down 0.2% m/m (expected 0.8%; last 1.2%) but up 3.3% yr/yr (last 4.7%).
  • France's December CPI was up 0.2% m/m (expected 0.3%; last -0.1%), rising 1.3% yr/yr (expected 1.5%; last 1.3%).
  • Italy's flash December CPI was up 0.1% m/m (expected 0.3%; last -0.1%), rising 1.3% yr/yr (expected 1.5%; last 1.3%). November Unemployment Rate dipped to 5.7% from 5.8% (expected 5.8%).
  • Swiss December CPI was down 0.1% m/m (expected -0.1%; last -0.1%) but up 0.6% yr/yr, as expected (last 0.7%).
• Today's Data:
  • The trade deficit widened to $78.2 billion in November (Briefing.com consensus -$77.9 billion) from an upwardly revised $73.6 billion (from -$73.8 billion) in October. The widening was the result of exports being $7.1 billion more than October exports and imports being $11.6 billion more than October imports.
    • The key takeaway from the report is that the import surge likely reflects a bid to get ahead of President-elect Trump's tariff plans, meaning businesses might have more inventory than usual waiting to be utilized/sold that detracts from import demand in coming months (i.e., post-inauguration).
  • The ISM Services PMI increased to 54.1% in December (Briefing.com consensus 53.0%) from 52.1% in November. The dividing line between expansion and contraction is 50.0%, so the December reading reflects services sector activity accelerating from November.
    • The key takeaway from the report is that it was a double-whammy for rate cut expectations in that the expansion in services sector activity accelerated while the prices index picked up noticeably, printing its first reading above 60.0% since January 2024.
  • Job openings increased to 8.098 million in November from a revised 7.839 million (from 7.744 million) in October.
  • $39 bln 10-year Treasury note reopening results (prior 12-auction average):
    • High yield: 4.680% (4.211%).
    • Bid-to-cover: 2.53 (2.54).
    • Indirect bid: 61.4% (67.4%). 
    • Direct bid: 23.0% (17.7%).
• Commodities:
  • WTI crude: +1.0% to $74.37/bbl
  • Gold: +0.7% to $2665.00/ozt
  • Copper: +1.0% to $4.20/lb
• Currencies:
  • EUR/USD: -0.4% to 1.0353
  • GBP/USD: -0.3% to 1.2486
  • USD/CNH: -0.1% to 7.3399
  • USD/JPY: +0.2% to 157.77
• The Day Ahead:
  • 7:00 ET: Weekly MBA Mortgage Index (prior -21.9%)
  • 8:15 ET: December ADP Employment Change (Briefing.com consensus 131,000; prior 146,000)
  • 8:30 ET: Weekly Initial Claims (Briefing.com consensus 218,000; prior 211,000) and Continuing Claims (prior 1.844 mln)
  • 10:00 ET: November Wholesale Inventories (Briefing.com consensus -0.2%; prior 0.2%)
  • 10:30 ET: Weekly crude oil inventories (prior -1.18 mln)
  • 12:00 ET: Weekly natural gas inventories (prior -116 bcf)
  • 14:00 ET: December FOMC Minutes 
  • 15:00 ET: November Consumer Credit (Briefing.com consensus $9.1 bln; prior $19.2 bln)
• Treasury Auctions:
  • 13:00 ET: $22 bln 30-yr Treasury bond reopening