Bond Market Update

Long End Climbs Despite Another Weak Auction

• U.S. Treasuries of most tenors climbed on Thursday while the 2-yr note underperformed after yesterday's show of relative strength. The trading day started in flat fashion, followed by a sideways drift through the initial 90 minutes of action. That sideways drift took place through the release of an upward revision to Q2 GDP (to 3.3% from 3.0%) and a weekly Initial Claims report (229,000; Briefing.com consensus 236,000), which showed an unexpected decrease. The sideways start gave way to an intraday rally that was paced by the long end. Treasuries reached their highs in the early afternoon, staying near their best levels even though today's $44 bln 7-yr note auction met weak demand. Foreign demand was well above average for a change, but this sale made for a sloppy finish to this week's note auction slate. Longer tenors finished just below their highs with the 10-yr yield stopping within two basis points of its August low (4.188%). Crude oil built on yesterday's advance while the U.S. Dollar Index fell 0.4% to 97.82.
• Yield Check:
  • 2-yr: +2 bps to 3.64%
  • 3-yr: UNCH at 3.59%
  • 5-yr: -1 bp to 3.70%
  • 10-yr: -3 bps to 4.21%
  • 30-yr: -4 bps to 4.87%

• News:
  • A federal judge will hear fired Fed Governor Cook's case tomorrow.
  • Mexico will raise tariffs on imports from China as part of its budget for 2026, according to Bloomberg.
  • Japan's top trade negotiator postponed his trip to Washington until next week.
  • The Bank of Korea left its policy rate at 2.50%, as expected.
  • Toyota's July global sales hit a record with help from a jump in exports ahead of the implementation of tariffs.
  • Expectations are on the rise for French Prime Minister Bayrou to lose his confidence vote that is scheduled for September 8.
  • India's July Industrial Production was up 3.5% yr/yr (expected 2.1%; last 1.5%) and July Manufacturing Output was up 5.4% m/m (last 3.9%).
  • Australia's Q2 Building Capital Expenditure rose 0.2% qtr/qtr (last 1.0%), Q2 Plant/Machinery Capital Expenditure rose 0.3% qtr/qtr (last -1.7%), and Private New Capital Expenditure rose 0.2% qtr/qtr (expected 0.8%; last -0.2%).
  • New Zealand's August ANZ Business Confidence rose to 49.7 from 47.8.
  • Eurozone's July Private Sector Loans were up 2.4% yr/yr, as expected (last 2.2%) and Loans to nonfinancials rose 2.8% yr/yr (last 2.7%). August Business and Consumer Survey fell to 95.2 from 95.7 (expected 96.0).
  • Italy's August Business Confidence fell to 87.4 from 87.8 (expected 87.2) and Consumer Confidence fell to 96.2 from 97.2 (expected 96.6). July Industrial Sales were up 1.2% m/m (last -2.1%), rising 0.3% yr/yr (last -1.8%).
  • Swiss Q2 GDP rose 0.1% qtr/qtr, as expected (last 0.4%), growing 1.2% yr/yr (expected 1.4%; last 1.8%).
• Today's Data:
  • Q2 GDP was revised up to 3.3% (Briefing.com consensus: 3.0%) from the advance estimate of 3.0%, helped by an upward revision to consumer spending; meanwhile, the GDP Price Deflator held at 2.0% (Briefing.com consensus: 2.0%).
    • The key takeaway from the report is that the Q2 strength revolved around the decrease in imports (-29.8%), which is a subtraction in the calculation of GDP. The next exports component contributed 4.95 percentage points to Q2 GDP growth versus 4.99 points with the advance estimate.
  • Initial jobless claims for the week ending August 23 decreased by 5,000 to 229,000 (Briefing.com consensus: 236,000). Continuing jobless claims for the week ending August 16 decreased by 7,000 to 1.954 million.
    • The key takeaway from the report is that initial jobless claims—a leading indicator-- continue to run at low levels, refuting the notion that the labor market is weak. Granted, the labor market has softened a bit, but it is not weak.
  • Pending Home Sales were down 0.4% in July (Briefing.com consensus 0.3%) after falling 0.8% in June.
  • Weekly natural gas inventories increased by 18 bcf after increasing by 13 bcf a week ago.
  • $44 bln 7-year Treasury note auction results (prior 12-auction average):
    • High yield: 3.925% (4.140%).
    • Bid-to-cover: 2.49 (2.62).
    • Indirect bid: 77.4% (69.5%).
    • Direct bid: 12.8% (20.8%).
• Commodities:
  • WTI crude: +0.8% to $64.62/bbl
  • Gold: +0.7% to $3473.70/ozt
  • Copper: +0.9% to $4.54/lb
• Currencies:
  • EUR/USD: +0.4% to 1.1686
  • GBP/USD: +0.1% to 1.3513
  • USD/CNH: -0.5% to 7.1193
  • USD/JPY: -0.4% to 146.86
• The Day Ahead:
  • 8:30 ET: July Personal Income (Briefing.com consensus 0.4%; prior 0.3%), Personal Spending (Briefing.com consensus 0.5%; prior 0.3%), PCE Prices (Briefing.com consensus 0.2%; prior 0.3%), Core PCE Prices (Briefing.com consensus 0.3%; prior 0.3%), July advance international goods trade (prior -$96.4 bln), July advance Retail Inventories (prior 0.3%), and July advance Wholesale Inventories (prior 0.2%)
  • 9:45 ET: August Chicago PMI (Briefing.com consensus 46.0; prior 47.1)
  • 10:00 ET: Final August University of Michigan Consumer Sentiment (Briefing.com consensus 58.6; prior 58.6)