Bond Market Update

Friday Rally Revisits February Highs

• U.S. Treasuries finished Friday with solid gains across the curve that allowed the Treasury complex to turn positive for the week with yields back near this month's lows. The trading day started on a slightly higher note with Treasuries of most tenors seeking their third consecutive advance. The market attempted to back away from the day's starting levels during the first few minutes of action, but Treasuries found support near yesterday's closing levels, rising as the morning went on. The market climbed past opening highs after flash February Manufacturing (51.6; prior 51.2) and Services (49.7; prior 52.9) PMI readings for the U.S. showed the first contraction in the services sector since early 2023. The next few hours saw a sideways drift below morning highs followed by another wave of buying that produced fresh highs after SCMP reported that a new bat coronavirus with potential for animal-to-human transmission was discovered in China. Today's advance resulted in the lowest settlement for the 10-yr yield since mid-December. This week's underperformance in longer tenors expanded the 2s10s spread by two basis points to 23 bps. Crude oil found resistance near its 50-day moving average (72.75), returning to its lowest levels of the year, while the U.S. Dollar Index rose 0.2% to 106.59, trimming this week's loss to 0.1%.
• Yield Check:
  • 2-yr: -8 bps to 4.19% (-7 bps this week)
  • 3-yr: -8 bps to 4.20% (-7 bps this week)
  • 5-yr: -8 bps to 4.26% (-6 bps this week)
  • 10-yr: -8 bps to 4.42% (-5 bps this week)
  • 30-yr: -7 bps to 4.67% (-2 bps this week)

• News:
  • President Trump repeated that a 25% tariff on auto imports will be implemented on April 2.
  • Bank of Japan Governor Ueda said that the central bank is ready to react to rising bond yields and respond "nimbly if markets make abnormal moves."
  • Reserve Bank of Australia Governor Bullock repeated that the domestic economic outlook remains uncertain.
  • Germany will hold a snap election on Sunday, which is likely to result in new leadership. Observers will be particularly interested in the support received by the fast-growing AfD party.
  • Japan's January CPI was up 0.5% m/m (last 0.6%). January National CPI was up 4.0% yr/yr (last 3.6%) and National Core CPI was up 3.2% yr/yr (expected 3.1%; last 3.0%). Flash February Manufacturing PMI hit 48.9 (expected 49.0; last 48.7) and flash February Services PMI hit 53.1 (last 53.0).
  • India's flash February Manufacturing PMI hit 57.1 (last 57.7) and flash Services PMI hit 61.1 (last 56.5).
  • Australia's flash February Manufacturing PMI hit 50.6 (last 50.2) and flash Services PMI hit 51.4 (last 51.2).
  • New Zealand's January trade deficit reached NZD486 mln (expected surplus of NZD225 mln; last surplus of NZD94 mln).
  • Eurozone's flash February Manufacturing PMI hit 47.3 (expected 46.9; last 46.6) and flash Services PMI hit 50.7 (expected 51.5; last 51.3).
  • U.K.'s January Retail Sales rose 1.7% m/m (expected 0.4%; last -0.6%), increasing 1.0% yr/yr (expected 0.6%; last 2.8%). January Core Retail Sales rose 2.1% m/m (expected 0.9%; last -0.9%), increasing 1.2% yr/yr (expected 0.5%; last 2.1%). January Public Sector Net Borrowing was down GBP15.44 bln (expected -GBP20.10 bln; last GBP18.12 bln). Flash February Manufacturing PMI hit 46.4 (expected 48.5; last 48.3) and flash Services PMI hit 51.1 (expected 50.8; last 50.8).
  • Germany's flash February Manufacturing PMI hit 45.5 (expected 45.3; last 45.0) and flash Services PMI hit 52.2 (expected 52.4; last 52.5).
  • France's February Business Survey rose to 97 from 96 (expected 96). Flash February Manufacturing PMI hit 45.5 (expected 45.3; last 45.0) and flash Services PMI hit 44.5 (expected 48.8; last 48.2).
• Today's Data:
  • The S&P Global U.S. Manufacturing PMI hit 51.6 in the flash reading for February, up from 51.2 in January.
    • The S&P Global U.S. Services PMI hit 49.7 in the flash reading for February, down from 52.9 in January.
  • Existing home sales decreased 4.9% month-over-month in January to a seasonally adjusted annual rate of 4.08 million (Briefing.com consensus 4.06 million) from an upwardly revised 4.29 million (from 4.24 million) in December. Sales were up 2.0% from the same period a year ago, which was the fourth straight monthly year-over-year increase.
    • The key takeaway from the report is that existing home sales are being suppressed by affordability constraints that are rooted in elevated home prices, which are tied to limited inventory, and elevated mortgage rates.
  • The final University of Michigan Index of Consumer Sentiment for February dropped to 64.7 (Briefing.com consensus 67.8) from the preliminary reading of 67.8. The final reading for January was 71.7. In the same period a year ago, the index stood at 76.9.
    • The key takeaway from the report is that the weakening in sentiment cut across groups by age, income, and wealth, and was attributed largely to worries about imminent price increases driven by tariff actions.
• Commodities:
  • WTI crude: -2.9% to $70.36/bbl
  • Gold: -0.1% to $2953.40/ozt
  • Copper: -1.5% to $4.54/lb
• Currencies:
  • EUR/USD: -0.4% to 1.0463
  • GBP/USD: -0.3% to 1.2632
  • USD/CNH: +0.3% to 7.2532
  • USD/JPY: -0.4% to 149.06
• The Week Ahead:
  • Monday: $69 bln 2-yr Treasury note auction results at 13:00 ET
  • Tuesday: December FHFA Housing Price Index (prior 0.3%) and December S&P Case-Shiller Home Price Index (prior 4.3%) at 9:00 ET; February Consumer Confidence (prior 104.1) at 10:00 ET; and $70 bln 5-yr Treasury note auction results at 13:00 ET
  • Wednesday: Weekly MBA Mortgage Index (prior -6.6%) at 7:00 ET; January New Home Sales (prior 698,000) at 10:00 ET; weekly crude oil inventories (prior +4.63 mln) at 10:30 ET; and $44 bln 7-yr Treasury note auction results at 13:00 ET
  • Thursday: Q4 GDP -- second estimate (prior 2.3%), Q4 GDP Deflator -- second estimate (prior 2.2%), weekly Initial Claims (prior 219,000) and Continuing Claims (prior 1.869 mln), and January Durable Orders (prior -2.2%), and Durable Orders ex-transportation (prior 0.3%) at 8:30 ET; January Pending Home Sales (prior -5.5%) at 10:00 ET; and weekly natural gas inventories (prior -196 bcf) at 10:30 ET
  • Friday: January Personal Income (prior 0.4%), Personal Spending (prior 0.7%), PCE Prices (prior 0.3%), and Core PCE Prices (prior 0.2%), advance January International Goods trade balance (prior -$122.1 bln), advance Retail Inventories (prior -0.3%), and advance Wholesale Inventories (prior -0.5%) at 8:30 ET; and February Chicago PMI (prior 39.5) at 9:45 ET