Bond Market Update

Short End Resists Initial Pressure

• U.S. Treasuries ended Wednesday on a mixed note, as shorter tenors recovered their opening losses while the long end finished in the red with the 30-yr yield setting a fresh 52-week high. The trading day started with losses across the curve that developed during the European session. The overnight selling followed notable weakness in British gilts as the market grew more concerned about potential stagflation in the British economy. The British pound reached its lowest level against the dollar since April while the 10-yr Gilt yield climbed past its 2023 high to a level last seen in 2008, fueling worries that the British government may be forced to raise taxes or cut spending to offset the rise in cost of servicing its debt. The early weakness in Treasuries had the 10-yr yield on the verge of rising past its high from last year (4.737%), but the market staged a small bounce shortly after the start with the front end leading the move. That move was assisted by the release of a below-consensus ADP Employment Change report for December (122,000; Briefing.com consensus 131,000), though that report was followed by an unexpected drop in weekly Initial Claims (201,000; Briefing.com consensus 218,000; prior 211,000). Longer tenors briefly turned positive in the early afternoon, hitting their best levels after the U.S. Treasury reopened $22 bln in 30-yr bonds to strong demand. However, late action saw a return toward today's opening levels. The FOMC released the Minutes from its latest policy meeting, reinforcing the belief that the next rate cut will be delayed past the March meeting. Crude oil gave back its gain from Tuesday while the U.S. Dollar Index climbed 0.5% to 109.09, nearing its high from the first session of the year (109.53). Tomorrow's session is likely to see reduced volume since the Treasury market will close an hour early while the equity market will be closed altogether for former President Carter's memorial.
• Yield Check:
  • 2-yr: -1 bp to 4.29%
  • 3-yr: UNCH at 4.36%
  • 5-yr: UNCH at 4.47%
  • 10-yr: +1 bp to 4.69%
  • 30-yr: +2 bps to 4.93%

• News:
  • CNN reported that President-elect Trump may declare a national economic emergency to have full authority to impose tariffs.
  • Bank of France Governor Villeroy de Galhau called on the French government to implement ambitious budget cuts to improve France's chronic fiscal issues.
  • HSBC lowered its forecast for China's 10-yr yield from 1.80% to 1.20%, roughly 40 basis points below the current level.
  • Chinese officials announced an expansion of a trade-in program to entice increased spending from households, but the announcement was deemed a disappointment.
  • Shanghai Securities News speculated about forceful monetary policy moves being on the horizon.
  • Former Bank of Japan Governor Kuroda said that more rate hikes will be made in the coming years.
  • Japan's Fast Retailing announced higher wages for new hires and current full-time workers.
  • Japan's December Household Confidence fell to 36.2 from 36.4 (expected 36.6).
  • South Korea's November Current Account surplus hit $9.30 bln (last $9.78 bln).
  • Australia's November CPI Indicator was up 2.30% yr/yr (expected 2.20%; last 2.10%).
  • Eurozone's December Business and Consumer Survey fell to 93.7 from 95.6 (expected 95.6). November PPI was up 1.6% m/m (expected 1.5%; last 0.4%) but down 1.2% yr/yr (expected -1.3%; last -3.3%). 
  • Germany's November Retail Sales fell 0.6% m/m (expected 0.5%; last -0.3%) but were up 2.5% yr/yr (expected 1.9%; last 5.1%). November Factory Orders fell 5.4% m/m (expected -0.3%; last -1.5%).
  • France's December Consumer Confidence fell to 89 from 90, as expected. November trade deficit reached EUR7.1 bln (expected deficit of EUR7.0 bln; last deficit of EUR7.5 bln). November Current Account deficit reached EUR1.7 bln (last deficit of EUR1.9 bln).
• Today's Data:
  • ADP reported private sector employment increased by 122,000 jobs in December (Briefing.com consensus 131,000) with the goods-producing sector adding 10,000 jobs and the service-providing sector adding 112,000 jobs. The West region (+82,000) saw the biggest gain in jobs while large establishments (+97,000) accounted for the most new jobs. It was noted that the 4.6% year-over-year pay growth for job stayers was the slowest pace since July 2021.
  • Initial jobless claims -- a leading indicator -- decreased by 10,000 to 201,000 (Briefing.com consensus 218,000) for the week ending January 4, which is the lowest print since January 2024. Continuing jobless claims for the week ending December 27 increased by 33,000 to 1.867 million.
    • The key takeaway from the report is that layoff activity is low, but for employees that lose their job it has become more challenging to find a new one.
  • Wholesale Inventories were down 0.2% in November (Briefing.com consensus -0.2%) after a revised unchanged reading (from 0.2%) in October.
  • Consumer credit decreased by $7.5 billion in November (Briefing.com consensus $9.1 billion) after increasing a downwardly revised $17.3 billion (from $19.2 billion) in October.
    • The key takeaway from the report is that consumer credit contracted in November for only the third time in the past 16 months with revolving credit, which is subject to extra high interest rates, acting as the drag.
  • The weekly MBA Mortgage Index fell 3.7% after falling 21.9% during a prior two-week period (impacted by Christmas). The Purchase Index was down 6.6% while the Refinance Index was up 1.5%.
  • Weekly crude oil inventories decreased by 959,000 barrels after decreasing by 1.18 mln barrels a week ago.
  • Weekly natural gas inventories decreased by 40 bcf after decreasing by 116 bcf a week ago.
  • $22 bln 30-year Treasury bond reopening results (prior 12-auction average):
    • High yield: 4.913% (4.394%).
    • Bid-to-cover: 2.52 (2.42).
    • Indirect bid: 66.6% (67.1%).
    • Direct bid: 20.7% (17.9%).
• Commodities:
  • WTI crude: -1.5% to $73.28/bbl
  • Gold: +0.3% to $2673.40/ozt
  • Copper: +1.7% to $4.27/lb
• Currencies:
  • EUR/USD: -0.3% to 1.0310
  • GBP/USD: -1.0% to 1.2355
  • USD/CNH: +0.2% to 7.3534
  • USD/JPY: +0.3% to 158.40
• The Day Ahead:
  • NYSE Closed for former President Carter's funeral
  • 14:00 ET: Treasury market early close