Bond Market Update

Treasuries Slide Back to 2026 Lows

• U.S. Treasuries had a poor finish to the week, which locked in weekly losses for the 10-yr note and shorter tenors while the long bond continued its recent show of outperformance, recording a modest gain for the week. Treasuries slipped out of the gate with shorter tenors leading the early weakness after overnight action saw a brief rise in the price of oil, and news that the Bank of Japan increased its policy rate by 25 basis points to 1.25%. The rate hike was not a surprise, but Governor Ueda refrained from striking a hawkish tone, which weighed on the yen, though the Japanese currency recovered more than half of its overnight loss during the U.S. session. The lower start in Treasuries was followed by some more selling during the first hour of action, pushing yields on 10s and shorter tenors back to their highest levels of the year. These yields finished within a few basis points of their 2026 highs that were set on Wednesday while the 30-yr yield settled seven basis points below its high from this week. This week's underperformance up front exerted additional pressure on the 2s10s spread, which tightened by eight basis points to 26 bps after narrowing by six basis points a week ago. Crude oil ended the week just above $100/bbl, essentially unchanged from last Friday's settlement, while the U.S. Dollar Index hit a seven-week high before returning to little changed at 100.25. The Index added 1.1% this week.
• Yield Check:
  • 2-yr: +5 bps to 4.74% (+10 bps this week)
  • 3-yr: +7 bps to 4.83% (+10 bps this week)
  • 5-yr: +6 bps to 4.86% (+7 bps this week)
  • 10-yr: +5 bps to 5.00% (+2 bps this week)
  • 30-yr: +4 bps to 5.33% (-3 bps this week)

• News:
  • Fed Governor Bowman spoke about the review into the 2023 failure of Silicon Valley Bank, noting that regulators failed to take action to reduce the bank's interest-rate risk or concentration vulnerabilities. She also said that the Board will consider revisions to stress tests.
  • The U.S. will reportedly delay the implementation of tariffs on excess manufacturing capacity until after the visit of China's President Xi.
  • China is targeting CNY3.5 trillion in pharmaceutical revenue by 2030.
  • Reserve Bank of Australia Governor Bullock said that the rise in global bond yields has not been disorderly, but he conceded that some upside risks to inflation are materializing.
  • A couple ECB officials spoke about the importance of avoiding second-round effects of inflation while ECB President Lagarde said that rate decisions will be made on a meeting-by-meeting basis.
  • British Chancellor Healey is lobbying EU officials to include the U.K. in its "Made in Europe" policy.
  • French Prime Minister Lecornu said that he is looking for EUR54 bln worth of savings in the budget for 2027, which should keep the deficit below 5.5% of GDP.
  • China's August FDI was down 5.3% YTD (last -6.2%).
  • Japan's August National CPI was up 0.1% m/m (last 0.5%), rising 1.9% yr/yr (last 1.9%). August National Core CPI was up 1.7% (expected 1.8%; last 1.8%).
  • South Korea's August PPI was up 0.2% m/m (last -0.4%), rising 7.9% yr/yr (last 7.7%).
  • New Zealand's August FPI was up 0.3% m/m (last 0.1%). August trade deficit reached NZD1.35 bln (expected deficit of NZD1.775 bln; last deficit of NZD2.118 bln).
  • Eurozone's July Current Account surplus reached EUR27.6 bln (expected surplus of EUR30.7 bln; last surplus of EUR35.1 bln). July Construction Output was unchanged m/m (last -1.53%).
  • U.K.'s August Retail Sales were up 0.5% m/m (expected -0.2%; last -0.5%), rising 2.4% yr/yr (expected 1.9%; last 1.2%). August Core Retail Sales were up 0.6% m/m (expected -0.2%; last -0.9%), rising 2.7% yr/yr (expected 1.9%; last 1.8%).
  • Germany's August PPI was up 1.1% m/m (expected 0.6%; last 1.1%), rising 4.6% yr/yr (expected 4.1%; last 3.0%).
• Today's Data:
  • Industrial production was unchanged month-over-month in August (Briefing.com consensus: 0.3%) following an unrevised 0.2% increase in July. The capacity utilization rate was 76.3% (Briefing.com consensus: 76.4%) and unchanged from July. Total industrial production was up 1.4% year-over-year. The capacity utilization rate was 3.1 percentage points below its long-run average.
    • The key takeaway from the report is that the softness stemmed from a decline in manufacturing output, yet that downturn could have been a simple case of attrition following increases in manufacturing output for seven consecutive months.
  • Conference Board's Leading Economic Index was down 0.1% in August (Briefing.com consensus 0.2%) after a 0.2% increase in July.
• Commodities:
  • WTI crude: -1.8% to $100.24/bbl
  • Gold: +0.6% to $4425.30/ozt
  • Copper: +0.5% to $6.69/lb
• Currencies:
  • EUR/USD: +0.1% to 1.1485
  • GBP/USD: +0.3% to 1.3394
  • USD/CNH: -0.1% to 6.6949
  • USD/JPY: +0.5% to 156.68
• The Week Ahead:
  • Monday: Nothing of note
  • Tuesday: $69 bln 2-yr Treasury note auction results at 13:00 ET
  • Wednesday: Weekly MBA Mortgage Index (prior -4.1%) at 7:00 ET; flash September S&P Global U.S. Manufacturing PMI (prior 53.9) and flash September S&P Global U.S. Services PMI (prior 56.5) at 9:45 ET; weekly crude oil inventories (prior -640,000) at 10:30 ET; and $70 bln 5-yr Treasury note auction results at 13:00 ET
  • Thursday: Q2 Current Account Balance (Briefing.com consensus -$221.0 bln; prior -$228.6 bln), weekly Initial Claims (Briefing.com consensus 202,000; prior 196,000), and Continuing Claims (prior 1.730 mln) at 8:30 ET; August New Home Sales (Briefing.com consensus 610,000; prior 607,000) at 10:00 ET; weekly natural gas inventories (prior +44 bcf) at 10:30 ET; and $44 bln 7-yr Treasury note auction results at 13:00 ET
  • Friday: August Durable Orders (Briefing.com consensus -0.4%; prior 1.1%) and Durable Orders ex-transport (Briefing.com consensus 0.5%; prior 0.4%) at 8:30 ET; and September University of Michigan Consumer Sentiment (Briefing.com consensus 47.8; prior 47.8) at 10:00 ET