Bond Market Update

Look Ma, Invisible Hands!

• U.S. Treasuries had a mixed showing on Wednesday, as 10s and 30s added to their gains from Tuesday while shorter tenors finished flat after retreating from a higher start. Treasuries started the cash session in positive territory, encouraged in part by an overnight rebound in JGBs. The opening gains were extended shortly after the start, once the U.S. Treasury announced that the maximum size of buybacks of longer tenors will be increased by at least 100% from the current $2 bln. The change will be made in time for the Treasury's September-November buyback period, and it should provide an additional buffer in the event of an energy shock that could result from a prolonging of the U.S.-Iran conflict. However, the main goal was to address the trifecta of elevated inflation expectations, deficit concerns, and aggressive bond issuance from technology companies, which had been drawing capital out of longer-dated Treasuries. Deutsche Bank opined this morning that the Treasury's action is akin to ‘Operation Twist' where proceeds from short-term bill sales will be used to support the longer end, resulting in some relief in yields on longer tenors. The long bond set a session high in late-morning trade, remaining near its best level into the close while the front end reversed after the initial uptick, spending the session in a slow retreat. The market did not receive any top-tier data today, but the Treasury sold $16 bln in 20-yr bonds to soft demand, though the 20-yr yield finished the day two basis points below the level seen before the auction. Crude oil climbed toward $87/bbl while the U.S. Dollar Index slid below its 200-day moving average (99.18), falling 0.8% to 98.83.
• Yield Check:
  • 2-yr: UNCH at 4.18%
  • 3-yr: UNCH at 4.25%
  • 5-yr: -2 bps to 4.35%
  • 10-yr: -5 bps to 4.65%
  • 30-yr: -9 bps to 5.19%

• News:
  • President Trump said that the implementation of a 50% tariff on Canadian imports could be paused for a few days.
  • President Trump said that he wants to meet with North Korea's Leader Kim Jong Un in November.
  • Moody's affirmed Australia's AAA rating with a Stable Outlook.
  • European Central Bank policymaker Rehn said that he has not seen clear signs of second-round effects, though he conceded that it is essential to anchor inflation expectations, while ECB President Lagarde said that the region can't miss out on the AI revolution.
  • Japan's June Core Machinery Orders were up 9.7% m/m (expected 7.2%; last -12.4%), rising 16.9% yr/yr (expected 10.8%; last -1.9%).
  • Australia's Q2 Wage Price Index was up 0.8% qtr/qtr, as expected (last 0.8%), rising 3.2% yr/yr, as expected (last 3.2%).
  • New Zealand's Q2 Input PPI was up 2.9% qtr/qtr (expected 1.3%; last 1.4%) and Output PPI was up 1.6% qtr/qtr (expected 0.8%; last 0.8%).
  • Eurozone's July CPI was up 0.2% m/m, as expected (last -0.1%), rising 2.9% yr/yr, as expected (last 2.8%). July Core CPI was unchanged m/m, as expected (last 0.2%), rising 2.5% yr/yr, as expected (last 2.4%). June Current Account surplus reached EUR35.10 bln (expected surplus of EUR26.8 bln; last surplus of EUR25.1 bln).
  • U.K.'s July CPI was up 0.3% m/m, as expected (last 0.1%), rising 2.9% yr/yr, as expected (last 2.6%). July Core CPI was up 0.2% m/m (expected 0.1%; last 0.3%), rising 2.6% yr/yr (expected 2.5%; last 2.6%). July Input PPI was down 1.7% m/m (expected 0.0%; last -1.9%) and Output PPI was up 0.2% m/m, as expected (last -0.1%).
  • Swiss Q2 Industrial Production was up 5.5% yr/yr (expected -4.7%; last -7.6%).
• Today's Data:
  • The weekly MBA Mortgage Index was down 0.4% after rising 3.6% a week ago. The Purchase Index was down 2.0% while the Refinance Index rose 1.5%.
  • Weekly crude oil inventories increased by 4.41 mln barrels after increasing by 17.42 mln barrels a week ago.
  • July FOMC Minutes showed that many policymakers believe that a rate hike will likely be needed if inflation does not ease.
  • $16 bln 20-year Treasury bond auction results (prior 12-auction average):
    • High yield: 5.204% (4.827%).
    • Bid-to-cover: 2.53 (2.64).
    • Indirect bid: 62.9% (64.9%).
    • Direct bid: 24.6% (24.3%).
• Commodities:
  • WTI crude: +0.9% to $85.68/bbl
  • Gold: +2.8% to $4545.80/ozt
  • Copper: +0.2% to $6.50/lb
• Currencies:
  • EUR/USD: +0.9% to 1.1675
  • GBP/USD: +0.5% to 1.3608
  • USD/CNH: -0.2% to 6.7301
  • USD/JPY: -0.8% to 158.29
• The Day Ahead:
  • 8:30 ET: Weekly Initial Claims (Briefing.com consensus 206,000; prior 209,000), Continuing Claims (prior 1.777 mln), and August Philadelphia Fed Survey (Briefing.com consensus 25.0; prior 41.4)
  • 10:30 ET: Weekly natural gas inventories (prior +36 bcf)