Bond Market Update

A Tough Day

• U.S. Treasuries had a tough outing after getting sold in the overnight trade and then getting sold further in the wake of a relatively soft $16 billion 20-yr bond auction. The initial selling was precipitated by a hotter-than-expected CPI print for April out of the UK, increased volatility in the Japanese government bond market, and deficit angst with press reports suggesting an agreement was reached to raise the SALT deduction cap to $40,000 while demands by conservative GOP members for larger Medicaid cuts had been dropped. The latter is questionable, and the reconciliation bill is still being debated within the House GOP, although there has been chatter that a full House vote on the bill could be held as early as tonight. In any case, the Treasury market didn't look comfortable today with the proceedings and then became more discombobulated after seeing the high yield for the 20-yr bond auction tail the when-issued yield by more than a basis point on some relatively soft dollar demand. The 10-yr note yield and 30-yr bond yield settled today's session at their highs. The U.S. Dollar Index dropped 0.6% to 99.55.
• Yield Check:
  • 2-yr: +4 bps to 4.01%
  • 3-yr: +7 bps to 4.01%
  • 5-yr: +10 bps to 4.16%
  • 10-yr: +12 bps to 4.60%
  • 30-yr: +13 bps to 5.09%

• News:
  • Republican leadership is getting close to a deal with holdouts on large reconciliation bill. House rules committee is meeting now, and the final House vote is expected this week (possibly tonight). Deal will raise state and local tax deduction to $40,000 & phase out clean energy tax cuts faster. Conservatives drop demands for larger Medicaid cuts, according to Politico
  • House Speaker Mike Johnson confirms on CNN that agreement has been reached to raise state and local tax deduction in large reconciliation bill to $40K (from $10K current law and from $30K in original bill text)
  • House Freedom Caucus Chair Andy Harris says "White House put forward a proposal that has support in the group — but leadership has to “figure out” how to incorporate it. He doesn’t think it can get passed today, though"
  • Intelligence suggests Israel is preparing to strike Iran's nuclear facilities, according to CNN
  • G-7 countries are considering tariffs on low value products from China, according to Bloomberg
  • The Trump administration considering plan to open retirement accounts to private equity, according to FT
  • Senate votes to advance stablecoin legislation to a full Senate vote; procedural vote was 69-31
  • ECB Vice President de Guindos said that the ECB is not rushing to cut rates due to worries about persistent wage growth
  • Longer-dated JGBs extended yesterday's sharp losses before bouncing
  • South Korea's exports through the first 20 days of May were down 2.4% yr/yr
  • MBA Mortgage Applications Index -5.1% wk/wk, with refinance applications -5% and purchase applications -5%
  • U.K.'s April CPI 1.2% m/m (expected 1.1%; last 0.3%); 3.5% yr/yr (expected 3.3%; last 2.6%). April Core CPI 1.4% m/m (expected 1.2%; last 0.5%); 3.8% yr/yr (expected 3.6%; last 3.4%)
• Today's Data:
  • MBA Mortgage Applications Index -5.1% wk/wk, with refinance applications down 5.0% and purchase applications down 5.0%
  • $16 bln 20-yr bond auction
    • High yield: 5.047% (When-Issued: 5.035%)
    • Bid-to-cover: 2.46 (prior 12-auction avg: 2.58)
    • Indirect bid: 69.0% (prior 12-auction avg: 69.5%)
    • Direct bid: 14.1% (prior 12-auction avg: 17.1%)
• Commodities:
  • WTI crude: -0.8% to $61.58/bbl
  • Gold: +0.9% to $3313.30/ozt
  • Copper: +0.2% to $4.67/lb
• Currencies:
  • EUR/USD: +0.4% to 1.1335
  • GBP/USD: +0.3% to 1.3429
  • USD/CNH: -0.2% to 7.2021
  • USD/JPY: -0.6% to 143.64
• The Day Ahead:
  • 08:30 ET: Initial Jobless Claims (Briefing.com consensus 232K; prior 229K) and Continuing Jobless Claims (prior 1881K)
  • 09:45 ET: Preliminary May S&P Global US Manufacturing PMI (prior 50.2) and Services PMI (prior 50.8)
  • 10:00 ET: April Existing Home Sales (Briefing.com consensus 4.15M; prior 4.02M)
  • 10:30 ET: EIA Natural Gas Inventories (prior +110 bcf)