Bond Market Update

Tariff Volatility Keeps Market on Edge

• U.S. Treasuries retreated again on Wednesday, lifting yields on longer tenors to their highest levels since late February while yields on the 5-yr note and shorter tenors climbed to two-week highs. The trading day started with losses that were paced by longer tenors after President Trump's reciprocal tariffs, including the 104% tariff on imports from China, went into effect overnight. China responded by raising tariffs on imports from the U.S. to 84%, fueling concerns about the impact of the ongoing retaliatory steps being taken by China and the United States. There was also some unease ahead of today's $39 bln 10-yr note reopening, given the recent selling and the massive pressure on the basis trade where hedge funds bet on price differentials between Treasuries in the cash market and Treasury futures. Continued stress in this arena will likely fuel speculation about a response from the Fed, not necessarily in the form of rate cuts, but through other measures like an expansion of the standing repurchase facility or an introduction of a new program that will act as a release valve. Treasuries revisited their opening lows just ahead of the 10-yr reopening, but jumped back to intraday highs after the sale was met with excellent foreign demand, which masked near-record low takedown by direct bidders, which is a group that includes individuals, investment funds, banks, and insurers. Shortly after the 10-yr reopening, President Trump said that the tariff on imports from China will be raised to 125% while reciprocal tariffs on imports from countries that are not retaliating will be held at 10% for 90 days to give time to negotiate. That announcement fueled a massive surge in risk, sending the Nasdaq higher by nearly 10% while shorter-dated Treasuries faced heavy pressure. Crude oil fell to its lowest level since February 2021 in overnight action but bounced strongly in the afternoon. The U.S. Dollar Index slipped 0.1% to 102.82.
• Yield Check:
  • 2-yr: +21 bps to 3.95%
  • 3-yr: +21 bps to 3.97%
  • 5-yr: +19 bps to 4.10%
  • 10-yr: +14 bps to 4.40%
  • 30-yr: +8 bps to 4.79%

• News:
  • St. Louis Fed President (FOMC voter) Musalem said that domestic growth is likely to slip below trend as the economy adjusts to new tariffs. However, he is not expecting a recession at this time.
  • Richmond Fed President (non-voter) Barkin said that tariff-induced price hikes are likely to begin by June, according to Axios.
  • Germany's expected new Chancellor Merz said that tariffs on all transatlantic trade should be reduced to 0%.
  • The Reserve Bank of New Zealand lowered its official cash rate by 25 basis points to 3.50%, as expected.
  • The Reserve Bank of India lowered its policy rate by 25 basis points to 6.00%, as expected.
  • Citi reduced its forecast for 2025 growth in China to 4.2% from 4.7% due to low expectations for a deal with the United States.
  • Japan's March Household Confidence fell to 34.1 from 34.8 (expected 34.7) and March Machine Tool Orders rose 11.4% yr/yr (last 3.5%).
  • South Korea's March Unemployment Rate rose to 2.9% from 2.7%.
  • Australia's February Building Approvals were down 0.3% m/m, as expected (last 6.9%) and Private House Approvals rose 1.0% m/m, as expected (last 1.4%).
• Today's Data: 
  • The FOMC released the Minutes from its March meeting in the late afternoon, but the report was seen as stale, given the volatility that has been experienced by markets over the past three weeks.
  • Wholesale Inventories increased by 0.3% in February (Briefing.com consensus 0.3%) after increasing 0.8% in January.
  • The weekly MBA Mortgage Index jumped 20.0% to follow last week's 1.6% decrease. The Purchase Index was up 9.2% while the Refinance Index jumped 35.3%.
  • Weekly crude oil inventories increased by 2.55 mln barrels after increasing by 6.17 mln barrels a week ago.
  • $39 bln 10-year Treasury note reopening results (prior 12-auction average):
    • High yield: 4.435% (4.311%).
    • Bid-to-cover: 2.67 (2.54).
    • Indirect bid: 87.9% (67.3%).
    • Direct bid: 1.4% (17.9%).
• Commodities:
  • WTI crude: +4.5% to $62.38/bbl
  • Gold: +3.0% to $3078.30/ozt
  • Copper: +5.6% to $4.35/lb
• Currencies:
  • EUR/USD: +0.1% to 1.0970 
  • GBP/USD: +0.5% to 1.2824
  • USD/CNH: -0.9% to 7.3554
  • USD/JPY: +0.7% to 147.30
• The Day Ahead:
  • 8:30 ET: March CPI (Briefing.com consensus 0.1%; prior 0.2%), Core CPI (Briefing.com consensus 0.3%; prior 0.2%), weekly Initial Claims (Briefing.com consensus 225,000; prior 219,000), and Continuing Claims (prior 1.903 mln)
  • 10:30 ET: Weekly natural gas inventories (prior +29 bcf)
  • 14:00 ET: March Treasury Budget (prior -$307.0 bln)
• Treasury Auctions:
  • 13:00 ET: $22 bln 30-yr Treasury bond reopening results