Bond Market Update

Pressured by Decent Data

• U.S. Treasuries had a modestly lower showing on Wednesday that pressured the complex from January highs that were reached during Tuesday's session. The trading day started with slim losses across the curve after another night of reduced activity due to ongoing Lunar New Year closures in Asia. Accordingly, the overnight news flow was somewhat subdued, though Japan announced its first round of investments into the U.S. that are part of the trade deal. Treasuries retreated from their starting levels after today's economic data was mostly better than expected. Housing Starts (1.404 mln; Briefing.com consensus 1.320 mln) and Building Permits (1.448 mln; Briefing.com consensus 1.412 mln) beat December expectations while Durable Orders (-1.4%; Briefing.com consensus -2.5%) showed a smaller-than-expected decrease in December. Industrial Production was up 0.7% in January (Briefing.com consensus 0.4%), thanks to strong growth in manufacturing output. Treasuries climbed off their lows in the late morning, but 10s and 30s hit fresh lows in the afternoon in response to a weak $16 bln 20-yr bond auction. Longer tenors finished near their lows while shorter tenors ended at levels seen through the bulk of the morning. The FOMC released its policy Minutes from the January meeting, showing that several participants would be open to a two-sided outline of the FOMC's future interest rate decisions that would call for rate hikes if inflation remains above target. Crude oil approached its January high (66.48) after bouncing off its 200-day moving average (62.42) amid ongoing speculation that military action against Iran could be imminent. The U.S. Dollar Index rose 0.6% to 97.72.
• Yield Check:
  • 2-yr: +2 bps to 3.46%
  • 3-yr: +2 bps to 3.49%
  • 5-yr: +2 bps to 3.65%
  • 10-yr: +3 bps to 4.08%
  • 30-yr: +2 bps to 4.71%

• News:
  • The Atlanta Fed's GDPNow forecast for Q4 GDP was lowered to 3.6% from 3.7% in the latest estimate.
  • The Reserve Bank of New Zealand left its official cash rate at 2.25%, as expected. The central bank's forward guidance left the door open for a rate hike by the end of the year.
  • European Central Bank President Lagarde is reportedly planning to leave her post before the French presidential election in early 2027, though her term as ECB president does not end until October 2027.
  • European Central Bank policymaker Villeroy de Galhau said that French growth is expected to exceed 1.0% this year, adding that the ECB has won the battle against inflation.
  • Japan's January trade surplus reached JPY460 bln (expected deficit of JPY180 bln; last deficit of JPY60 bln) as imports fell 2.5% yr/yr (expected 3.0%; last 5.2%) and exports jumped 16.8% yr/yr (expected 12.0%; last 5.1%).
  • Australia's January MI Leading Index was down 0.1% m/m (last 0.1%). Q4 Wage Price Index was up 0.8% qtr/qtr, as expected (last 0.8%), rising 3.4% yr/yr (last 3.3%).
  • New Zealand's Q4 Input PPI was down 0.5% qtr/qtr (expected 0.4%; last 0.2%) but up 0.1% qtr/qtr (expected 0.6%; last 0.6%).
  • U.K.'s January CPI was down 0.5% m/m, as expected (last 0.4%), rising 3.0% yr/yr, as expected (last 3.4%). January Core CPI was down 0.6% m/m (expected -0.7%; last 0.3%), rising 3.1% yr/yr (expected 3.0%; last 3.2%). January Input PPI was up 0.4% m/m, as expected (last -0.5%) and Output PPI was unchanged m/m (expected 0.2%; last -0.1%). January House Price Index rose 2.4% yr/yr (expected 1.8%; last 2.5%).
  • France's January CPI was down 0.3% m/m, as expected (last 0.1%), rising 0.3% yr/yr, as expected (last 0.8%).
• Today's Data:
  • Total housing starts increased 6.2% month-over-month in December to a seasonally adjusted annual rate of 1.404 million units (Briefing.com consensus: 1320K), with single-unit starts up 4.1%. Building permits increased 4.3% to a seasonally adjusted annual rate of 1.448 million (Briefing.com consensus: 1412K), with single-unit permits down 1.7%.
    • The key takeaway from the report is that it is not the answer for a supply-constrained housing market. Single-unit permits were down overall, but they fell the sharpest in the South (-5.3%), which is the nation's largest homebuilding region.
  • Durable goods orders declined 1.4% month-over-month in December (Briefing.com consensus: -2.6%), paced by a 5.3% decline in transportation equipment orders. Excluding transportation, durable goods orders rose 0.9% month-over-month (Briefing.com consensus: 0.3%) following a 0.4% increase in November.
    • The key takeaway from the report is that the weakness was concentrated in the transportation component. Otherwise, it was a solid report featuring a 0.6% increase in nondefense capital goods orders, excluding aircraft, which is a key gauge of business spending.
  • Industrial production increased 0.7% month-over-month in January (Briefing.com consensus 0.4%) after rising a revised 0.2% (from 0.4%) in December. The capacity utilization rate was 76.2% (Briefing.com consensus 76.5%) versus a revised 75.7% (from 76.3%) in December. Total industrial production increased 2.3% year-over-year while the capacity utilization rate was 3.2 percentage points below its long-run average.
    • The key takeaway from the report is that industrial production growth easily exceeded estimates thanks to a healthy 0.6% increase in manufacturing output, which was the biggest since February 2025, and a secondary boost from an increase in the output of utilities.
  • The weekly MBA Mortgage Index was up 2.8% to follow last week's 0.3% decrease. The Purchase Index fell 2.7% while the Refinance Index was up 7.1%.
  • $16 bln 20-year Treasury bond auction results (prior 12-auction average):
    • High yield: 4.664% (4.795%).
    • Bid-to-cover: 2.36 (2.64).
    • Indirect bid: 55.2% (65.3%).
    • Direct bid: 27.2% (22.6%).
• Commodities:
  • WTI crude: +4.3% to $64.99/bbl
  • Gold: +2.1% to $5009.40/ozt
  • Copper: +2.8% to $5.80/lb
• Currencies:
  • EUR/USD: -0.6% to 1.1788
  • GBP/USD: -0.5% to 1.3503
  • USD/CNH: +0.2% to 6.8926
  • USD/JPY: +0.9% to 154.73
• The Day Ahead:
  • 8:30 ET: Weekly Initial Claims (Briefing.com consensus 225,000; prior 227,000), Continuing Claims (prior 1.862 mln), December Trade Balance (Briefing.com consensus -$55.8 bln; prior -$56.8 bln), and February Philadelphia Fed survey (Briefing.com consensus 8.5; prior 12.6)
  • 10:00 ET: January Pending Home Sales (Briefing.com consensus 1.4%; prior -9.3%)
  • 10:30 ET: Weekly natural gas inventories (prior -249 bcf)
  • 12:00 ET: Weekly crude oil inventories (prior +8.53 mln)