Bond Market Update

Monday Gains Extended

• U.S. Treasuries continued their upbeat start to the week, sending the 30-yr yield to its lowest close since late April while yields on 5s and 10s recorded their lowest settlements since mid-May as the market remained optimistic that geopolitical tensions with Iran will become a distant memory soon. Treasuries started the day with relative strength in longer tenors, making for some catch-up action after they lagged yesterday. The higher start followed the night that included a rate hike from the Bank of Japan, but the move was telegraphed well in advance, resulting in a muted market reaction. Investors remained focused on the price of oil, which continued its retreat from multi-year highs that were briefly reached in March. This served as overall encouragement, helping Treasuries defend their early gains. The Treasury complex climbed past its early highs in mid-morning action, staying near their best levels after the U.S. Treasury sold $22 bln in 20-yr bonds to strong demand. The Tuesday advance left the 10-yr yield right above its 50-day moving average (4.423%) while the 2-yr yield finished near the midpoint of yesterday's range ahead of tomorrow's FOMC Decision and subsequent press conference, which will mark Fed Chairman Warsh's first public appearance at the helm of the central bank. Crude oil fell to $76/bbl while the U.S. Dollar Index slipped 0.1% to 99.56.
• Yield Check:
  • 2-yr: -2 bps to 4.05%
  • 3-yr: -2 bps to 4.09%
  • 5-yr: -4 bps to 4.15%
  • 10-yr: -4 bps to 4.43%
  • 30-yr: -4 bps to 4.93%

• News:
  • The Bank of Japan raised its policy rate by 25 basis points to 1.00% and hinted at additional hikes, as expected.
  • The Reserve Bank of Australia left its cash rate at 4.35%, as expected.
  • China's May Retail Sales were down 0.6% m/m (expected -0.3%; last 0.2%), May Industrial Production rose 4.5% yr/yr (expected 4.4%; last 4.1%), May Fixed Asset Investment fell 4.1% yr/yr (expected -2.3%; last -1.6%), and May House Prices fell 3.5% yr/yr (last -3.5%). May Unemployment Rate dipped to 5.1% from 5.2% (expected 5.2%).
  • Hong Kong's May Unemployment Rate remained at 3.7%.
  • South Korea's May Import Price Index was up 24.8% yr/yr (last 20.5%) and Export Price Index was up 46.9% (last 41.3%).
  • New Zealand's May FPI was up 1.0% m/m (last 0.0%).
  • Eurozone's June ZEW Economic Index rose to 9.5 from -9.1 (expected -7.2). Q1 Eurozone Wages were up 3.4% yr/yr (last 3.0%) and Q1 Labor Cost Index was up 3.2% yr/yr (expected 3.3%; last 3.3%).
  • Germany's June ZEW Economic Sentiment rose to 10.5 from -10.2 (expected -5.8) and ZEW Current Conditions fell to -81.0 from -77.8 (expected -77.5).
  • Italy's May CPI was up 0.4% m/m, as expected (last 1.1%), rising 3.2% yr/yr, as expected (last 3.2%).
• Today's Data:
  • Housing starts, meanwhile, plummeted 15.4% month-over-month to a seasonally adjusted annual rate of 1.177 million units (Briefing.com consensus: 1.440 million), with single-unit starts down 1.9%. Building permits were down 0.7% month-over-month to a seasonally adjusted annual rate of 1.413 million (Briefing.com consensus: 1.410 million), with single-unit permits up 0.6%. 
    • The key takeaway from the report is that the weakness in starts was concentrated on the multi-unit side, as starts there were down 40.2% month-over-month, yet it would be remiss not to mention that single-unit starts in the South—the largest homebuilding region—were down 5.2% month-over-month.
  • Import prices jumped 1.9% month-over-month in May and were up 6.7% year-over-year. Excluding fuel, import prices rose 0.8% month-over-month and were up 3.7% year-over-year. On the exports side, prices were up 1.3% month-over-month and up 11.2% year-over-year. Excluding agricultural products, export prices increased 1.2% month-over-month and were up 11.8% year-over-year.
  • $13 bln 20-year Treasury bond reopening results (prior 12-auction average):
    • High yield: 4.927% (4.809%).
    • Bid-to-cover: 2.75 (2.65).
    • Indirect bid: 71.6% (64.3%).
    • Direct bid: 19.9% (24.8%).
• Commodities:
  • WTI crude: -6.0% to $76.06/bbl
  • Gold: +0.1% to $4356.00/ozt
  • Copper: +0.2% to $6.50/lb
• Currencies:
  • EUR/USD: +0.2% to 1.1612 
  • GBP/USD: +0.2% to 1.3430
  • USD/CNH: UNCH at 6.7568
  • USD/JPY: +0.1% to 160.42
• The Day Ahead:
  • 7:00 ET: Weekly MBA Mortgage Index (prior 10.8%)
  • 8:30 ET: May Retail Sales (Briefing.com consensus 0.5%; prior 0.5%) and Retail Sales ex-auto (Briefing.com consensus 0.5%; prior 0.7%) 
  • 10:00 ET: April Business Inventories (prior 1.5%) and May Pending Home Sales (Briefing.com consensus 0.9%; prior 1.4%)
  • 10:30 ET: Weekly crude oil inventories (prior -7.23 mln)
  • 14:00 ET: June FOMC Rate Decision (Briefing.com consensus 3.50-3.75%; prior 3.50-3.75%)