Bond Market Update

Short End Leads Friday Advance

• U.S. Treasuries finished the week on a higher note with relative strength in shorter tenors driving yields on 5s and 2s to their lowest levels in a week while the long bond continued this week's underperformance. Treasuries started Friday on a higher note after an overnight advance in the futures market, which was assisted by a bullish net long-term TIC flows report for May, which showed that long-term foreign capital inflows into the U.S. exceeded long-term purchases of foreign securities by U.S. citizens by $259.4 bln, a near-record amount, second only to a $262.4 bln total that was recorded in March 2021. In addition, Fed Governor Waller repeated last evening that a rate cut should be made at the July FOMC meeting, but the fed funds futures market remains highly skeptical of that move with the CME FedWatch tool showing just a 4.7% implied likelihood of a rate cut on July 30. Treasuries defended their starting gains through the release of above-consensus Housing Starts (1.321 mln; Briefing.com consensus 1.300 mln) and Building Permits (1.397 mln; Briefing.com consensus 1.383 mln) for June, seeing some brief pressure after the preliminary reading of the University of Michigan's Consumer Sentiment Index for July (61.8; Briefing.com consensus 61.5) also beat expectations. The post-data selling was short-lived, as Treasuries inched past their opening highs in the late morning, staying at their best levels into the close. The advance lifted most tenors into positive territory for the week while the long bond lagged with its yield returning to the 5.000% mark. Crude oil slipped to $66/bbl, widening this week's loss to $2.40/bbl, or 3.5%, while the U.S. Dollar Index fell 0.3% to 98.49, narrowing this week's gain to 0.6%.
• Yield Check:
  • 2-yr: -4 bps to 3.88% (-3 bps this week)
  • 3-yr: -5 bps to 3.84% (-5 bps this week)
  • 5-yr: -4 bps to 3.96% (-3 bps this week)
  • 10-yr: -3 bps to 4.43% (+1 bp this week)
  • 30-yr: -1 bp to 5.00% (+4 bps this week)

• News:
  • The Atlanta Fed's GDPNow forecast for Q2 GDP was left unrevised at 2.4%.
  • Japan is headed for a weekend election that could result in the ruling LDP losing its majority, which would force the party to form a coalition government with parties that are looking to cut the consumption tax.
  • Japan's Prime Minister Ishiba met with U.S. Treasury Secretary Bessent today.
  • There is a growing likelihood of a rate cut from the Reserve Bank of Australia after yesterday's jobs report for June showed a rising unemployment rate.
  • Swedish appliance maker Electrolux reported strong results thanks in part to price hikes in the U.S. due to tariffs, but the company noted that some of its competitors are choosing to absorb the cost of higher tariffs.
  • Japan's June National CPI was up 0.1% m/m (last 0.3%), rising 3.3% yr/yr (last 3.5%). June National Core CPI was up 3.3% yr/yr (expected 3.4%; last 3.7%).
  • New Zealand's June Credit Card Spending was up 0.9% yr/yr (last 2.0%).
  • Eurozone's May Current Account surplus reached EUR32.3 bln (expected surplus of EUR34.8 bln; last surplus of EUR18.6 bln). May Construction Output was down 1.68% m/m (last 4.29%).
  • Germany's June PPI was up 0.1% m/m, as expected (last -0.2%) and down 1.3% yr/yr, as expected (last -1.2%).
• Today's Data:
  • Total housing starts increased 4.6% month-over-month in June to a seasonally adjusted annual rate of 1.321 million units (Briefing.com consensus: 1.300 million). That is the good news. The bad news is that single-unit starts declined 4.6% month-over-month. Total building permits increased 0.2% month-over-month to a seasonally adjusted annual rate of 1.397 million units (Briefing.com consensus: 1.383 million). That is the good news. The bad news is that single-unit permits declined 3.7% month-over-month.
    • The key takeaway from the report is that there wasn't any strength in single-unit starts and permits, which is where the strength needs to be to help curtail the affordability constraints in an existing home market that is still relatively light on available inventory for sale.
  • The preliminary University of Michigan Consumer Sentiment Index for July edged higher to 61.8 (Briefing.com consensus: 61.5) from the final reading of 60.7 for June, hitting its highest level in five months. In the same period a year ago, the index stood at 66.4.
    • The key takeaway from the report is that consumer sentiment, while not strong, has improved in recent months along with inflation expectations.
• Commodities:
  • WTI crude: -0.3% to $66.03/bbl
  • Gold: +0.4% to $3358.30/ozt
  • Copper: +1.8% to $5.61/lb
• Currencies:
  • EUR/USD: +0.2% to 1.1619
  • GBP/USD: UNCH at 1.3414
  • USD/CNH: -0.1% to 7.1798
  • USD/JPY: +0.2% to 148.77
• The Week Ahead:
  • Monday: June Leading Indicators (Briefing.com consensus -0.1%; prior -0.1%) at 10:00 ET
  • Tuesday: Nothing of note
  • Wednesday: Weekly MBA Mortgage Index (prior -10.0%) at 7:00 ET; June Existing Home Sales (Briefing.com consensus 4.00 mln; prior 4.03 mln) at 10:00 ET; weekly crude oil inventories (prior -3.86 mln) at 10:30 ET; and $13 bln 20-yr Treasury bond reopening results at 13:00 ET
  • Thursday: Weekly Initial Claims (Briefing.com consensus 225,000; prior 221,000) and Continuing Claims (prior 1.956 mln) at 8:30 ET; June New Home Sales (Briefing.com consensus 650,000; prior 623,000) at 10:00 ET; and weekly natural gas inventories (prior +46 bcf) at 10:30 ET
  • Friday: June Durable Orders (Briefing.com consensus -11.0%; prior 16.4%) and Durable Orders ex-transport (Briefing.com consensus -0.2%; prior 0.5%) at 8:30 ET