Bond Market Update

Late Rally Prevents Another Sideways Day

• U.S. Treasuries recorded solid gains on Thursday after an early continuation of this week's sideways drift gave way to a late rally that sent yields toward their closing levels from last Thursday. The trading day started with modest gains that were paced by longer tenors after a night that was quiet on the news front. The U.S. carried out strikes against Iranian targets, but that was expected after President Trump announced the plan yesterday. The modestly higher start met some brief selling in immediate reaction to the PPI report for May, which was hotter-than-expected at the headline level, but also included a downward revision to April's reading. As a result, the year-over-year rate for PPI accelerated to 6.5% from 5.7%, but on the positive side, Core PPI (0.4% month-over-month; Briefing.com consensus 0.4%), also included a downward revision to April, which left the year-over-year rate at 4.9% for the second consecutive month after April's reading was revised down to that level from 5.2%. The post-data selling was reversed shortly after the market made an appearance in the red, resulting in a sideways drift through the morning. The afternoon started with a weak 30-yr bond reopening, but that became a distant memory once President Trump said that tonight's round of strikes against Iran has been called off due to progress in finalizing a deal. Granted, this was not the first time that the market heard about a peace deal being just around the corner, but the news still elicited a positive reaction that lifted Treasuries and equities while oil remained below $90/bbl. The late rally sent the 30-yr yield past its 50-day moving average (4.975%) to its lowest settlement in five weeks while yields on shorter tenors settled a bit above their June lows. Crude oil settled just above its May low while the U.S. Dollar Index slipped 0.2% to 99.79 after a brief rise to its best level since the end of March.
• Yield Check:
  • 2-yr: -7 bps to 4.07%
  • 3-yr: -6 bps to 4.12%
  • 5-yr: -7 bps to 4.19%
  • 10-yr: -8 bps to 4.46%
  • 30-yr: -7 bps to 4.95%

• News:
  • PIMCO warned about an incoming wave of corporate defaults fueled by subprime borrowers.
  • The European Central Bank raised its interest rate corridor by 25 basis points, which was expected. The central bank also raised its inflation expectations and trimmed its growth expectations for 2026 and 2027.
  • Bank of Japan Governor Ueda will miss next week's policy meeting due to hospitalization, but the market remains confident that a rate hike will be announced.
  • South Korea's exports were up 86% yr/yr through the first ten days of June, with chip exports jumping 206%.
  • Germany's farm cooperative increased its wheat harvest forecast for the year due to good weather.
  • Japan's Q2 BSI Large Manufacturing Conditions fell to -1.8 from 3.8 (expected 4.2).
  • South Korea's May Unemployment Rate remained at 2.8%.
  • Australia's June MI Inflation Expectations slowed to 5.5% from 5.6%.
• Today's Data:
  • The Producer Price Index for final demand increased 1.1% month-over-month in May (Briefing.com consensus: 0.7%) following a downwardly revised 1.1% increase (from 1.4%) in April. Excluding food and energy, the index for final demand jumped 0.4% month-over-month (Briefing.com consensus: 0.4%) following a downwardly revised 0.7% increase (from 1.0%) in April. On a year-over-year basis, the index for final demand was up 6.5%, while the index for final demand, excluding food and energy, was up 4.9%.
    • The key takeaway from the report is that producers aren't finding much price relief; hence, it is expected that consumers won't find much price relief in the near-term either, unless producers choose to absorb the higher costs.
  • Initial jobless claims for the week ending June 6 increased by 4,000 to 229,000 (Briefing.com consensus: 222,000), while continuing claims for the week ending May 30 increased by 24,000 to 1.795 million.
    • Jobless claims were higher in the latest week, but the key takeaway remains that they are not at levels that would connote a material degradation of the labor market.
  • Weekly natural gas inventories increased by 108 bcf after increasing by 95 bcf a week ago.
  • $22 bln 30-year Treasury bond reopening results (prior 12-auction average):
    • High yield: 5.020% (4.814%).
    • Bid-to-cover: 2.33 (2.39).
    • Indirect bid: 60.0% (64.9%).
    • Direct bid: 25.3% (23.8%).
• Commodities:
  • WTI crude: -2.4% to $87.81/bbl
  • Gold: -0.3% to $4122.50/ozt
  • Copper: +0.2% to $6.28/lb
• Currencies:
  • EUR/USD: +0.3% to 1.1574
  • GBP/USD: +0.4% to 1.3417
  • USD/CNH: -0.2% to 6.7672
  • USD/JPY: -0.4% to 159.87
• The Day Ahead:
  • 10:00 ET: Preliminary June University of Michigan Consumer Sentiment (Briefing.com consensus 46.2; prior 44.8)