Bond Market Update

Midweek Dip Reversed

• U.S. Treasuries enjoyed a swift recovery from their shallow midweek dip with the belly leading Thursday's advance. The trading day started with solid gains across the curve after a fairly quiet night that was headlined by an expected 25-basis point rate cut to 3.75% from the Bank of England while the European Central Bank did not announce any policy changes, which was also expected. Besides the small dose of international news the market got a chance to respond to President Trump's address from last evening, during which he said that the next Fed Chairman will support much lower rates. The president also announced cash bonuses for members of the military and said that his administration is looking into improving housing affordability. Treasuries followed their higher start with some volatility in reaction to the release of the delayed November CPI report. That report was a bit unusual since it did not include month-over-month changes due to missing data from October. However, the year-over-year CPI growth rate slowed to 2.7% from 3.0% while core CPI decelerated to 2.6% from 3.0%, making for a welcome sight. On a side note, weekly jobless claims (224,000; Briefing.com consensus 229,000) decreased by more than expected. The 10-yr note and the long bond added to their early gains after the morning batch of data while 5s and shorter tenors found resistance near their post-data highs, backpedaling into the afternoon. The pullback in shorter tenors found support with 5s and 2s eventually returning to their opening levels while 10s and 30s finished between their starting marks and their highs. Crude oil saw a small extension of yesterday's bounce off this year's low while the U.S. Dollar Index inched up 0.1% to 98.42.
• Yield Check:
  • 2-yr: -3 bps to 3.46%
  • 3-yr: -3 bps to 3.50%
  • 5-yr: -4 bps to 3.66%
  • 10-yr: -4 bps to 4.12%
  • 30-yr: -3 bps to 4.80%

• News:
  • Japan is planning record defense spending of JPY9 trln for 2026.
  • The People's Bank of China injected some liquidity through reverse repurchases.
  • China Securities Times speculated that the need for reserve requirement ratio cuts is lower due to proactive fiscal policy.
  • Australia reduced its borrowing forecast for 2026 by AUD25 bln due to an improved surplus forecast.
  • Central banks in Norway and Sweden did not make any policy changes.
  • EU officials met in Brussels to discuss a potential seizure of frozen Russian assets, but several countries remain opposed to this action.
  • Germany is planning record debt issuance of EUR512 bln for 2026.
  • Australia's December MI Inflation Expectations accelerated to 4.7% from 4.5%.
  • New Zealand's Q3 GDP expanded 1.1% qtr/qtr (expected 0.9%; last -1.0%), growing 1.3% yr/yr, as expected (last -1.1%).
  • Eurozone's October Construction Output was up 0.88% m/m (last -0.58%).
  • France's December Business Survey rose to 102 from 98 (expected 98).
  • Swiss November trade surplus reached CHF3.841 bln (expected surplus of CHF5.32 bln; last surplus of CHF4.203 bln).
• Today's Data:
  • Total CPI for the two-month period from September to November was up 0.2% (Briefing.com consensus: 0.3%), while core CPI, which excludes food and energy, was also up 0.2% for the two-month period (Briefing.com consensus: 0.3%). The October data were not available due to the government shutdown. On a year-over-year basis, total CPI increased 2.7% versus a prior 3.0%, and core CPI was up 2.6% versus a prior 3.0%.
    • The key takeaway from the report is twofold: first, it is a messy report because of the lack of October data, but secondly and more to the point today, the disinflation in the year-over-year readings is a welcome sight for policymakers and market participants.
  • Initial jobless claims for the week ending December 13 decreased by 13,000 to 224,000 (Briefing.com consensus: 229,000). Continuing jobless claims for the week ending December 6 increased by 67,000 to 1.897 million.
    • The key takeaway from the report is its low firing-low hiring dynamic, evidenced by the decrease in initial claims and the increase in continuing claims. That is a delicate balance that helps validate the Fed's willingness to walk the line with a rate cut at its December meeting, particularly when paired with the disinflation seen in the November CPI report.
  • The Philadelphia Fed survey fell to -10.2 in December (Briefing.com consensus 2.9) from -1.7 in November.
  • Weekly natural gas inventories decreased by 167 bcf after decreasing by 177 bcf a week ago.
• Commodities:
  • WTI crude: +0.3% to $55.96/bbl
  • Gold: -0.2% to $4364.30/ozt
  • Copper: UNCH at $5.44/lb
• Currencies:
  • EUR/USD: -0.1% to 1.1727
  • GBP/USD: +0.1% to 1.3388
  • USD/CNH: -0.1% to 7.0327
  • USD/JPY: -0.1% to 155.49
• The Day Ahead:
  • 10:00 ET: November Existing Home Sales (Briefing.com consensus 4.10 mln; prior 4.10 mln) and final December University of Michigan Consumer Sentiment (Briefing.com consensus 53.3; prior 53.3)