Bond Market Update

Treasuries Dip As Fed Removes Guidance Shackles

• U.S. Treasuries had a mixed outing on Wednesday after sideways morning trade gave way to some post-FOMC volatility that produced losses in 10s and shorter tenors while the long bond outperformed. The trading day started with slim losses, but early resilience brought the market toward yesterday's closing levels shortly after the start even though the May Retail Sales report (0.9%; Briefing.com consensus 0.5%) came in comfortably ahead of expectations. The complex navigated a sideways range into the afternoon, falling in immediate reaction to the first FOMC Statement with Chairman Warsh at the helm. The policy Statement was much shorter than past releases, simply announcing the decision to keep the fed funds rate range steady, with an added observation that economic activity is expanding at a solid pace despite elevated uncertainty. The Statement acknowledged that inflation has remained elevated, which prompted an increase to the central bank's PCE forecast for 2026 to 3.6% from 2.7% while the outlook for 2027 was increased to 2.3% from 2.2%. The central bank also nudged its 2026 unemployment rate forecast down to 4.3% from 4.4% while the growth outlook for this year was lowered to 2.2% from 2.3%. The median forecast for the fed funds rate at the end of the year increased to 3.8% from 3.4%. During his press conference, Fed Chairman Warsh reiterated the core message of the policy statement, adding that forward guidance is not well suited to "current policy juncture." He made it clear that he does not want financial markets to continue evaluating data by trying to guess the Fed's response to the data. He also signaled future reforms to the Fed's conduct of monetary policy by announcing task forces that will focus on five areas: (1) Fed's communications, (2) balance sheet, (3) use and reliance on existing data sources, (4) productivity and jobs in an era of transformation, and (5) Fed's inflation frameworks. Treasuries diverged after the initial post-FOMC selling, with the 2-yr note remaining at its low while longer tenors outperformed, resulting in a modest gain in the long bond. Crude oil spent the bulk of the session near $76bbl while the U.S. Dollar Index rose 0.4% to 99.94.
• Yield Check:
  • 2-yr: +11 bps to 4.16%
  • 3-yr: +9 bps to 4.18%
  • 5-yr: +8 bps to 4.23%
  • 10-yr: +4 bps to 4.46%
  • 30-yr: UNCH at 4.93%

• News:
  • China's annual forum on national financial issues started today and will continue tomorrow. People's Bank of China Governor Pan said that China's low-yield environment will be addressed through adjusting overnight reverse repurchase operations.
  • Reserve Bank of Australia Assistant Governor Jones said that the country's financial system needs to be prepared for potential shocks.
  • The Bank of France lowered its domestic growth forecast for 2026 to 0.5% from 0.9%.
  • Japan's May trade deficit reached JPY90 bln (expected deficit of JPY210 bln; last deficit of JPY200 bln) as imports grew 12.5% yr/yr (expected 12.8%; last 9.8%) and exports jumped 17.0% yr/yr (expected 16.2%; last 14.8%). June Reuters Tankan Index rose to 13 from 8. April Core Machinery Orders were up 8.7% m/m (expected 1.2%; last 9.8%), rising 15.6% yr/yr (expected 9.3%; last 5.9%).
  • Australia's May MI Leading Index was unchanged m/m (last 0.1%). 
  • New Zealand's Q1 Current Account deficit reached 3.6% of GDP (prior deficit 3.7% of GDP). Q2 Westpac Consumer Sentiment fell to 80.4 from 94.7.
  • Singapore's May trade surplus reached SGD5.57 bln (last surplus of SGD13.13 bln) as non-oil exports rose 7.7% yr/yr (last 11.0%), jumping 38.4% yr/yr (expected 30.0%; last 24.4%).
  • Eurozone's final May CPI was up 0.1% m/m, as expected (last 1.0%), rising 3.2% yr/yr, as expected (last 3.0%). May Core CPI was up 0.3% m/m, as expected (last 0.9%), rising 2.6% yr/yr (expected 2.5%: last 2.2%).
  • U.K.'s May CPI was up 0.2% m/m (expected 0.4%; last 0.7%), rising 2.8% yr/yr (expected 3.0%; last 2.8%). May Core CPI was up 0.3% m/m (expected 0.4%; last 0.7%), rising 2.6% yr/yr (expected 2.7%; last 2.5%). May Input PPI was up 0.2% m/m (expected 0.5%; last 2.6%) and Output PPI was up 0.5% m/m, as expected (last 1.5%). May House Price Index was up 3.8% yr/yr (expected 2.8%; last 0.0%).
• Today's Data:
  • Total retail sales increased 0.9% month-over-month in May (Briefing.com consensus: 0.5%) following a downwardly revised 0.4% increase (from 0.5%) in April. Excluding autos, retail sales jumped 0.8% (Briefing.com consensus: 0.5%) on the heels of an unrevised 0.7% increase in April.
    • The key takeaway from the report is that it shows real demand. The data are not adjusted for price changes, and retail sales activity in May outpaced the rate of inflation (+0.5%) in May. Moreover, excluding gasoline station sales (+3.4%), retail sales were still up 0.7%.
  • Pending Home Sales were up 3.8% in May (Briefing.com consensus 0.9%) after increasing a revised 0.9% (from 1.4%) in April.
  • Business Inventories were up 0.5% in April after increasing a revised 1.0% (from 1.5%) in March.
  • The weekly MBA Mortgage Index was down 3.8% to follow last week's 10.8% increase. The Purchase Index was down 3.5% while the Refinance Index fell 4.5%.
  • Weekly crude oil inventories decreased by 8.263 mln barrels after decreasing by 7.227 mln barrels a week ago.
• Commodities:
  • WTI crude: UNCH at $76.09/bbl
  • Gold: +0.6% to $4381.70/ozt
  • Copper: -0.2% to $6.49/lb
• Currencies:
  • EUR/USD: -0.7% to 1.1524
  • GBP/USD: -0.8% to 1.3323
  • USD/CNH: +0.2% to 6.7687
  • USD/JPY: +0.1% to 160.53
• The Day Ahead:
  • 8:30 ET: June Philadelphia Fed survey (Briefing.com consensus 10.0; prior -0.4), weekly Initial Claims (Briefing.com consensus 226,000; prior 229,000), and Continuing Claims (prior 1.795 mln)
  • 10:30 ET: Weekly natural gas inventories (prior 108 bcf)
  • 16:00 ET: April Net Long-Term TIC Flows (prior $81.3 bln)