Bond Market Update

Defending Recent Gains

• U.S. Treasuries of most tenors recorded their third consecutive day of gains while the long bond underperformed, ending with a slight loss. Treasuries were on track to give back a slight portion of their gains from the past two days at the open after a generally quiet night that saw some ongoing volatility in chip-related stocks. Treasuries followed their lower start with an immediate bounce that followed today's batch of economic data, even though all the reports beat headline expectations. However, the reports prompted the Atlanta Fed to lower its GDPNow forecast for Q2 GDP to 2.5% from 3.0% due to a downward revision to the real personal consumption expenditures forecast. There was also a slight dip in rate hike expectations, though the market remains fairly confident that one rate increase will be announced before the end of 2026. The early bounce off lows briefly pressured the 30-yr yield to its lowest level since early March, but the 30-yr bond spent the rest of the day in a pullback that resulted in a slightly lower finish while shorter tenors dipped from their highs in late trade but still finished with some of their gains. Crude oil briefly dipped below $70/bbl before bouncing while the U.S. Dollar Index slipped 0.2% to 101.43.
• Yield Check:
  • 2-yr: -2 bps to 4.12%
  • 3-yr: -2 bps to 4.12%
  • 5-yr: -1 bp to 4.16%
  • 10-yr: -1 bp to 4.39%
  • 30-yr: UNCH at 4.86%

• News:
  • Banxico left its policy rate at 6.50%, as expected.
  • Bank of Japan policymaker Tamura said that the central bank needs to keep hiking rates every few months until reaching the neutral rate of about 2%.
  • Japan's Prime Minister Takaichi said that her government is forming a plan for Japan to become an asset management nation.
  • Thailand's central bank left its policy rate at 1.00%.
  • European Central Bank policymaker Schnabel said that there has been an improvement in the short-term situation, but more rate hikes are needed.
  • Germany is planning to sell $138 bln of debt in Q3.
  • Japan's April Leading Index rose to 116.1 from 114.0 (expected 115.9) and Coincident Indicator was up 1.3% m/m (expected 1.1%; last 0.2%).
  • Australia's May Employment increased by 40,300 (expected 31,200; last -40,700) and full employment increased by 5,200 (last -21,700). May Unemployment Rate fell to 4.4% from 4.5%, as expected, and May Participation Rate rose to 66.7% from 66.6%, as expected.
  • Hong Kong's May trade deficit reached HKD44.2 bln (last deficit of HKD29.5 bln) as imports grew 42.0% m/m (last 44.4%) and exports rose 40.8% m/m (last 42.9%).
  • Germany's July GfK Consumer Climate rose to -29.2 from -29.7 (expected -27.8).
  • U.K.'s June CBI Distributive Trades Survey fell to -54 from -46 (expected -41).
  • France's June Consumer Confidence rose to 84 from 82 (expected 83).
  • Italy's April Industrial Sales increased 0.3% m/m (last 1.8%), growing 3.2% yr/yr (last 4.2%).
  • Spain's Q1 GDP was up 0.6% qtr/qtr, as expected (last 0.8%), expanding 2.7% yr/yr, as expected (last 2.7%). May PPI was up 10.5% yr/yr (last 8.3%).
• Today's Data:
  • Personal income increased 0.7% month-over-month in May (Briefing.com consensus: 0.3%) after being unchanged in April. Personal spending also rose 0.7% month-over-month (Briefing.com consensus 0.3%) following a downwardly revised 0.4% increase (from 0.5%) in April. The PCE Price Index was up 0.4%, as expected, and up 4.1% year-over-year versus 3.8% in April. The core PCE Price index, which excludes food and energy, increased 0.3%, also as expected, and was up 3.4% year-over-year versus 3.3% in April.
    • The key takeaway from the report is that, first, there weren't any headline shocks for the PCE price indexes. They were in line with expectations, allowing participants to assume that next month's readings will look better given the sharp decline in oil prices. Secondly, real PCE was up 0.3% month-over-month, demonstrating that spending was driven by increased demand and not just higher prices. This will be a nice input for Q2 GDP forecasts.
  • Q1 GDP was revised up to 2.1% (Briefing.com consensus: 1.6%) from the second estimate of 1.6%. The GDP Price Deflator was bumped up to 3.6% (Briefing.com consensus: 3.5%) from the second estimate of 3.5%.
    • The key takeaway from the report is that Q1 GDP was stronger than originally thought, due primarily to a downward revision to imports, which are a subtraction in GDP calculations.
  • Initial jobless claims for the week ending June 20 declined by 12,000 to 215,000 (Briefing.com consensus: 225,000), while continuing jobless claims for the week ending June 13 increased by 21,000 to 1.821 million.
    • The key takeaway from the report is that initial jobless claims continue to track at low levels, offering a nice cue that suggests the labor market, overall, remains on solid ground.
  • Durable goods orders declined 4.5% month-over-month in May (Briefing.com consensus: -3.2%) following an upwardly revised 8.5% increase (from 7.9%) in April. Excluding transportation, durable goods orders were up a sturdy 1.3% month-over-month (Briefing.com consensus: 0.5%) following an upwardly revised 1.4% increase (from 1.1%) in April.
    • The key takeaway from the report is that there was a healthy pickup in business spending in May, evidenced by the 1.6% increase in new orders for nondefense capital goods excluding aircraft.
  • Weekly natural gas inventories increased by 76 bcf after increasing by 73 bcf a week ago.
  • $44 bln 7-year Treasury note auction results (prior 12-auction average):
    • High yield: 4.260% (4.002%).
    • Bid-to-cover: 2.50 (2.50).
    • Indirect bid: 57.6% (65.3%).
    • Direct bid: 29.7% (24.1%).
• Commodities:
  • WTI crude: +2.2% to $71.96/bbl
  • Gold: +1.0% to $4048.40/ozt
  • Copper: +2.2% to $6.08/lb
• Currencies:
  • EUR/USD: +0.1% to 1.1371
  • GBP/USD: +0.3% to 1.3198
  • USD/CNH: -0.1% to 6.8021
  • USD/JPY: UNCH at 161.79
• The Day Ahead:
  • 8:30 ET: May advance International Trade in Goods (prior -$82.4 bln), advance Retail Inventories (prior 0.7%), and advance Wholesale Inventories (prior 0.5%)
  • 10:00 ET: Final June University of Michigan Consumer Sentiment (Briefing.com consensus 48.9; prior 48.9)