Bond Market Update

Belly Leads Friday Pullback

• U.S. Treasuries retreated on Friday with the belly leading the way, but the entire complex still ended up with solid gains for the week. Few things are certain in the market, but today's session was undeniably much quieter than it would have been had participants received the monthly Employment Situation report from the BLS. However, that report will not see the light of day until the government reopens. The Senate failed to advance a continuing resolution today and not much progress is expected to be made over the weekend. Treasuries started the day near their flat lines, but selling pressure began building right after the start. The weakness continued through the first couple hours of action, with Treasuries reaching lows after the release of the ISM Services PMI (50.0%; Briefing.com consensus 51.7%) even though the report was weaker than expected, pointing to a standstill in the services sector. The final reading of the S&P Global U.S. Services PMI (54.2) pointed to ongoing expansion, but the ISM report tends to be a bigger market-mover. The morning retreat sent yields toward their morning highs from Thursday while midday trade saw a shallow rebound that eventually gave way to a return to lows. Crude oil recorded its first gain since last Friday, trimming this week's loss to $4.84/bbl or 7.4%. The U.S. Dollar Index slipped 0.1% to 97.73, falling 0.5% for the week.
• Yield Check:
  • 2-yr: +2 bps to 3.57% (-8 bps this week)
  • 3-yr: +3 bps to 3.59% (-7 bps this week)
  • 5-yr: +4 bps to 3.71% (-6 bps this week)
  • 10-yr: +3 bps to 4.12% (-7 bps this week)
  • 30-yr: +2 bps to 4.71% (-6 bps this week)

• News:
  • President Trump said that Hamas has until Sunday to accept the peace deal with Israel or face consequences.
  • OPEC+ will meet this Sunday and the market expects that an output increase will be announced.
  • Bank of Japan Governor Ueda said that the central bank must maintain accommodative policy, which was seen as a slight pushback to rising rate hike expectations.
  • Japan's LDP leadership vote will take place tomorrow with Agriculture Minister Shinjiro Koizumi still seen as a slight favorite.
  • U.K.'s Office of Budget Responsibility will publish some forecasts today that will help shape the autumn budget statement on November 26.
  • Italy lowered its growth forecast for 2025 to 0.5% from 0.6% while the outlook for 2026 was reduced to 0.7% from 0.8%. The 2025 budget deficit target was lowered to 3.0% from 3.3% due to strong tax revenues.
  • France's socialist party is seeking to prevent pension reform or push through a tax on individuals with high net worth.
  • Japan's August Unemployment Rate rose to 2.6% from 2.3% (expected 2.4%) and jobs/applications ratio fell to 1.20 from 1.22 (expected 1.22). September Services PMI hit 53.3 (expected 53.0; last 53.1).
  • Singapore's August Retail Sales were up 0.5% m/m (last 3.9%), rising 5.2% yr/yr (last 4.6%).
  • Australia's September Services PMI hit 52.4 (expected 52.0; last 55.8).
  • Eurozone's September Services PMI hit 51.3 (expected 51.4; last 50.5). August PPI was down 0.3% m/m (expected -0.1%; last 0.3%), falling 0.6% yr/yr (expected -0.4%; last 0.2%).
  • Germany's September Services PMI hit 51.5 (expected 52.5; last 49.3).
  • U.K.'s September Services PMI hit 50.8 (expected 51.9; last 54.2).
  • France's August Industrial Production was down 0.7% m/m (expected 0.3%; last -0.1%). September Services PMI hit 48.5 (expected 48.9; last 49.8).
  • Italy's September Services PMI hit 52.5 (expected 51.5; last 51.5). August Retail Sales were down 0.1% m/m (expected 0.0%; last 0.0%) but up 0.5% yr/yr (last 1.8%). Q2 Public Deficit hit 2.0% (last 8.1%).
  • Spain's September Services PMI hit 54.3 (expected 53.3; last 53.2).
• Today's Data:
  • The ISM Services PMI decreased to 50.0% in September (Briefing.com consensus 51.7%) from 52.0% in August. The dividing line between expansion and contraction is 50.0%, so the September reading reflects services sector activity stagnating.
    • The key takeaway from the report is that it carries some stagflation messaging for the nation's largest business sector: no growth, contracting employment, and higher inflation.
  • The S&P Global U.S. Services PMI hit 54.2 in the final reading for September, up from the flash reading of 53.9, but down from the final August reading of 54.5.
• Commodities:
  • WTI crude: +0.6% to $60.85/bbl
  • Gold: +1.1% to $3909.10/ozt
  • Copper: +3.2% to $5.11/lb
• Currencies:
  • EUR/USD: +0.2% to 1.1738
  • GBP/USD: +0.3% to 1.3480
  • USD/CNH: +0.1% to 7.1361
  • USD/JPY: +0.2% to 147.49
• The Week Ahead:
  • Monday: Nothing of note
  • Tuesday: August Trade Balance (Briefing.com consensus -$61.0 bln; prior -$60.2 bln) at 8:30 ET; $58 bln 3-yr Treasury note auction results at 13:00 ET; and August Consumer Credit (Briefing.com consensus $13.1 bln; prior $16.0 bln) at 15:00 ET
  • Wednesday: Weekly MBA Mortgage Index (prior -12.7%) at 7:00 ET; weekly crude oil inventories (prior +1.79 bln) at 10:30 ET; and $39 bln 10-yr Treasury note reopening results at 13:00 ET 
  • Thursday: Weekly Initial Claims (Briefing.com consensus 233,000; prior NA) and Continuing Claims (prior NA) at 8:30 ET; August Wholesale Inventories (Briefing.com consensus -0.2%; prior 0.1%) at 10:00 ET; weekly natural gas inventories (prior +53 bcf) at 10:30 ET; and $22 bln 30-yr Treasury bond auction results at 13:00 ET
  • Friday: Preliminary October University of Michigan Consumer Sentiment (Briefing.com consensus 54.5; prior 55.1) at 10:00 ET and September Treasury Budget (Briefing.com consensus -$83.0 bln; prior -$344.8 bln) at 14:00 ET