Bond Market Update

Belly Leads Thursday Slide

• U.S. Treasuries faced heavy selling on Thursday that drove yields to their highest closing levels in at least two weeks. The market started the day on a lower note, but the early losses were limited. The early focus was on yesterday's social media post from President Trump, in which he revealed that a trade deal with the U.K. will be announced on Thursday. The market bounced off early lows after today's economic data included a disappointing Productivity report for Q1, which showed a larger-than-expected decrease in productivity (-0.8%; Briefing.com consensus -0.4%), coupled with a bigger-than-expected increase in Unit Labor Costs (5.7%; Briefing.com consensus 4.0%). Treasuries began slipping away from their opening levels after President Trump made the trade deal announcement, which includes a reduction to tariffs on imports of British steel, aluminum, and vehicles, and said that other trade deals are on the way. Around that same time, the New York Fed released its April Survey of Consumer Expectations, showing no change in year-ahead inflation expectations (3.6%) while the three-year outlook increased to 3.2% from 3.0%. The five-year outlook decreased to 2.7% from 2.9%. Treasuries remained on the defensive as the day went on, sliding to fresh lows after the U.S. Treasury sold $25 bln in 30-yr bonds to weak demand. Today's selling lifted yields on 5s and longer tenors to their highest closing levels in two weeks while the 2-yr yield settled at a three-week high. Crude oil reclaimed yesterday's loss, approaching $60/bbl, even as the U.S. Dollar Index rose 1.0% to 100.61.
• Yield Check:
  • 2-yr: +10 bps to 3.89%
  • 3-yr: +12 bps to 3.88%
  • 5-yr: +12 bps to 3.99%
  • 10-yr: +10 bps to 4.37%
  • 30-yr: +6 bps to 4.84%

• News:
  • The Atlanta Fed's GDPNow forecast for Q2 GDP was increased to 2.3% from 2.2% in the previous estimate.
  • House Republicans are looking into increasing state and local tax deduction caps, according to Bloomberg.
  • President Trump has encouraged House Speaker Johnson to pursue a higher top tax rate and a closing of the carried interest loophole, according to Punchbowl News.
  • Chinese press speculated that Chinese bonds will enter a "slow bull market" on expectations of more easing.
  • Nikkei reported that Japan may include shipbuilding in a potential trade deal with the United States.
  • New Zealand's Prime Minister Luxon said that the budget will allocate more money to capital projects.
  • The Bank of England lowered its bank rate by 25-basis points to 4.25%, as expected.
  • Germany's March trade surplus reached EUR21.1 bln (expected surplus of EUR19.0 bln; last surplus of EUR17.9 bln) as imports fell 1.4% m/m (expected 0.4%; last 0.5%) and exports rose 1.1% m/m (expected 1.0%; last 1.8%). March Industrial Production was up 3.0% m/m (expected 0.9%; last -1.3%) but down 0.4% yr/yr (last -4.1%).
  • U.K.'s April Halifax House Price Index were up 0.3% m/m (expected 0.2%; last -0.5%), rising 3.2% yr/yr (expected 2.6%; last 2.9%).
  • Spain's March Industrial Production was up 1.0% yr/yr (last -1.9%).
• Today's Data:
  • The weekly initial jobless claims report held some good news. Initial jobless claims for the week ending May 3 decreased by 13,000 to 228,000 (Briefing.com consensus 238,000), while continuing jobless claims for the week ending April 26 decreased by 29,000 to 1.879 million.
    • The key takeaway from the report is the step down in initial jobless claims -- a leading indicator -- from the prior week, as it leaves initial claims at a level that is consistent with a fairly solid labor market and far from recession-like levels.
  • The preliminary Q1 Productivity Report held some bad news. Nonfarm business sector labor productivity decreased 0.8% in the first quarter (Briefing.com consensus -0.4%), with output down 0.3% and hours worked up 0.6%. That was the first decline in productivity since the second quarter of 2022. Unit labor costs surged 5.7%, reflecting a 4.8% increase in hourly compensation and a 0.8% decrease in productivity.
    • The key takeaway from the report is the jump in unit labor costs stemming from the weak productivity, although the first-quarter earnings reports in aggregate have not conveyed any strong profit margin pressures as a result of higher labor costs.
  • Wholesale Inventories increased by 0.4% in March (Briefing.com consensus 0.5%) after increasing 0.3% in February.
  • Weekly natural gas inventories increased by 104 bcf after increasing by 107 bcf a week ago.
  • $25 bln 30-year Treasury bond auction results (prior 12-auction average):
    • High yield: 4.819% (4.553%).
    • Bid-to-cover: 2.31 (2.42).
    • Indirect bid: 58.9% (66.0%).
    • Direct bid: 27.2% (19.5%).
• Commodities:
  • WTI crude: +3.2% to $59.94/bbl
  • Gold: -2.6% to $3305.00/ozt
  • Copper: -1.5% to $4.59/lb
• Currencies:
  • EUR/USD: -0.8% to 1.1224
  • GBP/USD: -0.3% to 1.3250
  • USD/CNH: +0.3% to 7.2453
  • USD/JPY: +1.5% to 145.89
• No Data on Tomorrow's Schedule