Bond Market Update

Market Meets Midweek Crosswinds

• U.S. Treasuries recorded slim midweek losses after spending another day inside a narrow trading range even though today's session saw the release of the May CPI report (0.5%; Briefing.com consensus 0.5%). Treasuries inched past yesterday's highs in morning action after the CPI report matched headline expectations and showed cooler-than-expected Core CPI (0.2%; Briefing.com consensus 0.3%). However, the year-over-year Core CPI growth rate still accelerated to 2.9% from 2.8% in April, so the report was not great, but rather slightly better-than-feared. Despite the positive start, Treasuries never made it past yesterday's highs and faced some late-morning pressure after President Trump said that more attacks on Iran are being planned for today in response to the recent downing of a U.S. Army helicopter. Treasuries reached fresh lows in the early afternoon even though today's $39 bln 10-yr note reopening was well received with foreign demand coming in firmly above average. However, the final thrust to lows was reversed as the afternoon went on, leaving the market with slim losses. Crude oil recovered a portion of yesterday's loss while the U.S. Dollar Index remained near its best level since early April.
• Yield Check:
  • 2-yr: +1 bp to 4.13%
  • 3-yr: +1 bp to 4.18%
  • 5-yr: +1 bp to 4.26%
  • 10-yr: +1 bp to 4.54%
  • 30-yr: +1 bp to 5.02%

• News:
  • The Bank of Canada left its policy rate at 2.25%, as expected.
  • Japan's Ministry of Finance sold 30-yr JGBs to weak demand, but the cash market held up well despite the poor sale.
  • Japan's largest banks plan to launch live stablecoin transactions in fiscal 2026/27.
  • Germany's Institute of Economic Research noted that the domestic economy is expected to contract in Q2 and Q3.
  • China's May CPI was down 0.1% m/m (expected -0.2%; last 0.3%) but up 1.2% yr/yr (expected 1.3%; last 1.2%). May PPI was up 3.9% yr/yr, as expected (last 2.8%).
  • Japan's May PPI was up 0.9% m/m (expected 0.5%; last 2.8%), rising 6.3% yr/yr (expected 5.6%; last 5.3%).
  • Australia's April Building Approvals were down 3.4% m/m, as expected (last -10.5%) but up 10.2% yr/yr, as expected (last 9.0%). April Private House Approvals were down 1.0% m/m, as expected (last 0.5%).
  • Italy's April Industrial Production was up 0.5% m/m (expected 0.0%; last 0.6%), rising 1.3% yr/yr (last 1.4%).
• Today's Data:
  • Total CPI increased 0.5% month-over-month in May (Briefing.com consensus: 0.5%), leaving it up 4.2% year-over-year versus 3.8% in April. Core CPI, which excludes food and energy, increased 0.2% month-over-month (Briefing.com consensus: 0.3%) and was up 2.9% year-over-year versus 2.8% in April. The energy index accounted for over 60% of the increase in the monthly all items index.
    • The key takeaway from the report is that core CPI was not as bad as feared, but that doesn't mean it was good. Core CPI is still running well above the Fed's 2.0% inflation target, so this report was by no means a game-changer in terms of the prevailing view that the Fed won't be cutting rates anytime soon.
  • The Treasury Department reported a $292.6 billion deficit for May (Briefing.com consensus: $202.5 bln), which was $23 billion less than the deficit reported for May 2025. Receipts totaled $335.5 billion, while outlays reached $628.2 billion.
    • The key takeaway from the report, for some, will be the decline in customs duties, but even more important is the continued increase in the outlay for net interest ($107 billion), which was 47% more in May than the outlay for national defense.
  • The weekly MBA Mortgage Index rose 10.8% to follow last week's 2.5% drop. The Purchase Index was up 7.3% while the Refinance Index jumped 15.3%.
  • Weekly crude oil inventories decreased by 7.227 million barrels after decreasing by 7.974 million barrels a week ago.
  • $39 bln 10-year Treasury note reopening results (prior 12-auction average):
    • High yield: 4.538% (4.230%).
    • Bid-to-cover: 2.59 (2.48).
    • Indirect bid: 78.2% (68.8%).
    • Direct bid: 12.3% (21.0%).
• Commodities:
  • WTI crude: +2.0% to $89.93/bbl
  • Gold: -3.7% to $4133.80/ozt
  • Copper: -0.8% to $6.27/lb
• Currencies:
  • EUR/USD: +0.1% to 1.1546
  • GBP/USD: +0.1% to 1.3376
  • USD/CNH: UNCH at 6.7800
  • USD/JPY: +0.1% to 160.50
• The Day Ahead:
  • 8:30 ET: May PPI (Briefing.com consensus 0.7%; prior 1.4%), Core PPI (Briefing.com consensus 0.4%; prior 1.0%), weekly Initial Claims (Briefing.com consensus 222,000; prior 215,000), and Continuing Claims (prior 1.786 mln)
  • 10:30 ET: Weekly natural gas inventories (prior +95 bcf)
• Treasury Auctions:
  • 13:00 ET: $22 bln 30-yr Treasury bond reopening results