Bond Market Update

Lower Start Reversed

• U.S. Treasuries ended Wednesday on a mostly higher note after overcoming some early weakness with the front end leading the way. Treasuries appeared to be on track for their second consecutive loss, having started the day in the red after an overnight slide alongside other sovereign debt, but the entire complex started rising off lows about 30 minutes after the cash start. The bounce continued into the late morning with the market finding some midday resistance near the unchanged level, but the afternoon saw a push to fresh highs despite an underwhelming $16 bln 20-yr bond auction. The afternoon also included the release of the January FOMC Minutes, which confirmed that the central bank wants to see more progress on inflation before another rate cut and a belief that a strong economy can withstand restrictive policy. The Wednesday reversal pressured the 2-yr yield back below its 50-day moving average (4.280%) while the 10-yr yield returned to the 50-day moving average of its own (4.527%). Crude oil briefly climbed above its 50-day moving average (72.60) before giving back the bulk of its gain while the U.S. Dollar Index inched up 0.1% to 108.04.
• Yield Check:
  • 2-yr: -3 bps to 4.27%
  • 3-yr: -3 bps to 4.29%
  • 5-yr: -2 bps to 4.37%
  • 10-yr: -1 bp to 4.54%
  • 30-yr: UNCH at 4.77%

• News:
  • President Trump supports the House plan for one large reconciliation bill instead of the Senate's two-part approach.
  • The Reserve Bank of New Zealand lowered its official cash rate by 50 basis points to 3.75%, as expected. Governor Orr said that two more 25-basis point cuts can be expected by the middle of the year.
  • There were growing expectations for the passage of the K-Chips Act that will increase tax incentives for South Korean chipmakers.
  • European Central Bank policymaker Panetta said that signs of weakness in the eurozone economy are more persistent than what has been anticipated.
  • China's January House Prices fell 5.0% yr/yr (last -5.3%). January FDI was down 13.4% YTD (last -27.1%).
  • Japan's December Core Machinery Orders were down 1.2% m/m (expected 0.4%; last 3.4%) but up 4.3% yr/yr (expected 6.9%; last 10.3%). January trade deficit reached JPY2.759 trln (expected deficit of JPY2.10 trln; last surplus of JPY132.5 bln) as imports rose 16.7% yr/yr (expected 9.7%; last 1.7%) and exports increased 7.2% yr/yr (expected 7.9%; last 2.8%).
  • Australia's January MI Leading Index was up 0.1% m/m last 0.0%). Q4 Wage Price Index rose 0.7% qtr/qtr (expected 0.8%; last 0.9%), increasing 3.2% yr/yr, as expected (last 3.6%).
  • New Zealand's Q4 Input PPI was down 0.9% qtr/qtr (last 1.9%) and Output PPI was down 0.1% qtr/qtr (last 1.5%).
  • Eurozone's December Current Account surplus reached EUR38.4 bln (expected surplus of EUR30.2 bln; last surplus of EUR25.0 bln).
  • U.K.'s January CPI was down 0.1% m/m (expected -0.3%; last 0.3%) but up 3.0% yr/yr (expected 2.8%; last 2.5%). January Core CPI was down 0.4% m/m (expected -0.5%; last 0.3%) but up 3.7% yr/yr, as expected (last 3.2%). January Input PPI was up 0.8% m/m (expected 0.7%; last 0.2%) and Output PPI was up 0.5% m/m (expected 0.2%; last -0.2%). January House Price Index rose 4.6% yr/yr (expected 3.2%; last 3.3%).
• Today's Data:
  • January housing starts declined 9.8% month-over-month to a seasonally adjusted annual rate of 1.366 million (Briefing.com consensus 1.400 million) from an upwardly revised 1.515 million (from 1.499 million) in December. Building permits rose 0.1% to a seasonally adjusted annual rate of 1.483 million (Briefing.com consensus 1.450 million) from a downwardly revised 1.482 million (from 1.483 million) in December.
    • The key takeaway from the report is that there was no growth in starts or permits for single-family housing units, which will contribute to ongoing affordability constraints in the existing home market, which is short on inventory. Single-unit starts were down 8.4% month-over-month while single-unit permits were flat.
  • The weekly MBA Mortgage Index was down 6.6% after increasing 2.3% a week ago. The Purchase Index was down 5.9% while the Refinance Index fell 7.3%.
  • $16 bln 20-year Treasury bond auction results (prior 12-auction average): 
    • High yield: 4.830% (4.547%).
    • Bid-to-cover: 2.43 (2.60).
    • Indirect bid: 63.0% (69.9%).
    • Direct bid: 19.5% (17.0%).
• Commodities:
  • WTI crude: +0.4% to $72.07/bbl
  • Gold: -0.5% to $2935.40/ozt
  • Copper: -0.4% to $4.56/lb
• Currencies:
  • EUR/USD: -0.2% to 1.0425
  • GBP/USD: -0.2% to 1.2583
  • USD/CNH: +0.2% to 7.2856
  • USD/JPY: -0.3% to 151.53
• The Day Ahead:
  • 8:30 ET: February Philadelphia Fed Survey (Briefing.com consensus 20.5; prior 44.3), weekly Initial Claims (Briefing.com consensus 217,000; prior 213,000), and Continuing Claims (prior 1.850 mln)
  • 10:30 ET: Weekly natural gas inventories (prior -100 bcf)
  • 11:00 ET: Weekly natural gas inventories (prior +4.07 mln)