Bond Market Update from

3:47 pm - The Week in Review

  • Treasuries saw solid gains this week, supported by weakness in equities, a dovish Fed, and fears over the health of the Portuguese banking system.
  • Traders returned from their 4th of July holiday weekend to two days of selling for equities, which provided a boost for Treasuries early on in the week. 
  • Wednesday's dovish FOMC minutes provided a mid-week boost as the Committee reiterated they were in no rush to raise the Fed Funds Rate, and that asset purchases could still be boosted, if necessary. Notable was the suggestion the Fed could increase the taper to $15 bln at the October meeting to end the taper one meeting earlier than some were expecting.
  • Late-week buying came following reports out of Portugal indicating the parent company of the country's second largest bank, Banco Espirito Santo, may possibly default on its debt.
  • Data was low impact with the most notable releases being the mixed initial (304K actual v. 311K expected) and continuing (2584K actual v. 2567K expected) claims numbers.
  • This week's auctions were average at best.
  • Tuesday's $27 bln 3y note drew 0.992% (WI 0.996%) and a slightly better than average 3.38x bid/cover. A solid showing from indirect bidders (38.2%) helped offset the tepid direct bid (12.7%). Primary dealers ended up with 49.1% of the supply.
  • Wednesday's sloppy $21 bln 10y reopening drew 2.597% (WI 2.585%) and a light 2.57x bid/cover. Indirect (39.6%) and direct (13.9%) bids were below their 12-auction averages, but primary dealers were left with 46.5% of the supply. 
  • Thursday's $13 bln 30y bond reopening drew 3.369% (WI 3.362%) and a 2.40x bid/cover. Indirect bidders (53.3%) helped offset the weak demand from direct bids (11.1%), leaving primary dealers with just 35.6% of the supply. 
  • Up front, the 2y eased -7bps to 0.456%. The yield began the week at levels last seen during the debt ceiling debate back in September before ending the week on support in the 0.450% area. 
  • In the belly, the 5y fell -12bps to 1.641%. Action ended the week on support guarded by both the 50 and 100 dma.
  • The 10y shed -14bps to 2.520%. The benchmark yield tested support in the 2.500%/2.520% area into the weekend, but could not break the level. 
  • At the long end, the 30y erased -14bps to 3.343%. Trade probed 3.340% support, but the bulls were unable to produce a test of  the May lows.  
  • Curve flattening won out as the 2-10-yr spread narrowed to 206.5bps and the 5-30-yr spread tightened to 170bps.
The Week Ahead
  • There is no data on Monday. 
  • Tuesday will see retail sales, Empire Manufacturing, import/export prices (8:30), and business inventories (10). 
  • Wednesday's data is heavy as the weekly MBA Mortgage Index (7), PPI (8:30), Net Long Term TIC Flows (9), industrial production, capacity utilization, the NAHB Housing Market Index (10), and the Fed's Beige Book (14) are due out. 
  • Data continues to flow on Thursday with initial and continuing claims, housing starts, building permits (8:30), and the Philly Fed (10). STL's Bullard discusses the U.S. economy and monetary policy (13:35). 
  • Data slows on Friday with just Michigan Sentiment (9:55) and leading indicators (10) crossing the wires.

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2:17 pm - Dollar Gains Amid Lackluster Trade:

  • The Dollar Index trades on the highs near 80.20 as a sleepy session nears the close.
  • A lackluster trade has seen the Index limited to a tight five cent range for much of the day. 
  • EURUSD is flat @ 1.3605 as trade continues to test support in the area. A quiet day for news and data has kept the single currency in a 30 pip range. Eurozone data due out Monday is limited to industrial production. ECB head Mario Draghi will speak in Strasbourg, France. French banks are closed on Monday in observance of National Day.
  • GBPUSD is -20 pips @ 1.7110 as light selling takes hold for a second session. Today's weakness has sterling looking at its lowest close of July, and has kept minor support in the 1.7100 area in focus. A breakdown of that level puts the more important 1.7000 area on the table. 
  • USDCHF is flat @ .8925 as trade continues to test resistance in the area guarded by the 50 and 200 dma. Today's sleepy session has seen action limited to a tight 20 pip range.
  • USDJPY is unchanged @ 101.30. Any negative close would be the lowest since February as the bears continue their efforts to push action below the key 101.25 level. 
  • AUDUSD is -5 pips @ .9385 as a lackluster session draws to a close. Minor resistance near .9400 has posed a problem for the bulls over the past couple of sessions, but the bears have been unable to break .9350 support and the 50 dma. 
  • USDCAD is +75 pips @ 1.0725 as action nears three-week highs. Today's advance comes after Canada's employment change (-9.4K actual v. 20.7K expected) fell short of estimates, causing the unemployment rate to tick up to 7.1% (7.0% expected, 7.0% previous). Resistance in the 1.0820 area is also home to both the 50 and 200 dma.

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12:55 pm - Afternoon Update: 2y unch @ 100 02/32...3y +01/32 @ 99 26/32...5y +02/32 @ 99 30/32...7y +04/32 @ 99 31/32...10y +06/32 @ 99 28/32...30y +16/32 @ 100 21/32...EURUSD -5 pips @ 1.3600...GBPUSD -25 pips @ 1.7105...USDJPY unch @ 101.30...USDCHF unch @ .8925...AUDUSD -10 pips @ .9380...USDCAD +70 pips @ 1.0720

11:52 am - Yields Press Support:

  • Treasuries linger near their best levels of the day as trade drifts into the lunchtime hour
  • Buying continues to have the biggest impact on the long end as the 30y trades -2.1bps @ 3.343%. 
  • Support in the area remains in focus with a breakdown likely producing a test of the May lows. The 10y trades -1.8bps @ 2.514%. The benchmark yield continues to test its own support in the 2.500%/2.520% region. 
  • The belly lags with the 5y -1.3bps @ 1.635%. Support at current levels is defended by both the 50 and 100 dma. 
  • A slightly flatter curve has taken hold with the 2-10-yr spread tighter @ 206bps
  • Precious metals hold little changed with gold and silver @ $1337 and $21.50, respectively. 
  • The Treasury budget will cross the wires at 2pm ET.

11:49 am - Busy Week Ahead with Yellen, Earnings, Econ Data on Tap: The Dollar Index continues to trade in the 80-80.20 area as markets weigh Fed policy, European debt, and geopolitical situations. It has been a busy day for Fed speakers, but little in the way of new information with the Fed's Evans remaining dovish and the Fed's Plosser remaining hawkish. At 2pm, the Fed's Lockhart will likely reiterate his dovish stance on Fed policy. Next week will provide more insight into the economy with Yellen testimony, retail sales, Empire Manufacturing (Tue), PPI, industrial production (Wed), housing starts & permits, Philly Fed (Thu) and preliminary Michigan Sentiment (Fri) all due out. 

  • The euro continues to linger around the 1.3600 level. The single currency was able to regain 1.3600 as some of the fears and tension surrounding Portugal eased, but the currency continues to fail to see interested bids above that level. 1.3600 has remained a key level for the euro since about a week before the Draghi QE announcement and will continue to be an important level until the markets see an inflection point. Next week will be dominated by U.S. economic data, the Yellen testimony, and U.S. earnings, but an inflation report from the EU on Thursday will garner plenty of attention. 
  • The pound is resting on 1.7100 as we head toward the end of the week. Sterling has settled down after hitting a multi-year high of 1.7180 on July 4. The market will be paying close attention to the country's inflation report next Tuesday.
  • The yen has seen its recent rally slow as markets settle down. The yen has been boosted recently by the European bank strife. Yesterday it hit a multi-week high, but it has seen its recent momentum slow. It has been able to hold the current levels and is threatening to move higher. Markets will await next week's BoJ minutes (Thu) for a read into the direction for the central bank.

9:50 am - Treasuries Test the Highs:

  • Treasuries press session highs amid a sleepy trade. 
  • A lack of tradable data and news has kept yields in a tight 1bp range during the cash session. 
  • Early strength is paced by the long bond with the 30y -1.9bps @ 3.345%. 
  • A -1.2bp decline has the 10y testing support in the 2.500%/2.520% area. 
  • Little change along the curve has the 2-10-yr spread stuck @ 207.5bps
  • Precious metals hover little changed with gold and silver @ $1338 and $21.48, respectively.

8:09 am - European Yields:

  • Yields hover little changed across Europe. 
  • German Bunds hold small losses with light selling causing the 10y to climb +1bp to 1.210%. The benchmark yield holds just a handful of bps above its lifetime lows. 
  • UK Gilts trade flat amid a lackluster session. The 10y holds @ 2.625%. 
  • French OATs hold little changed. A flat session has the 10y stick @ 1.535%. 
  • Italian BTPs are offered after today's 3y auction drew a record low 0.84% (0.89% previous). Light selling has yields higher by a couple of bps with the 10y ticking up to 2.790%.
  • Spanish Bonos are bid after the country's inflation rate posted a cooler than expected 0.1% YoY (0.2% YoY). A modest bid has yields across most of the curve off -3bps, dropping the 10y to 2785%. 
  • Portuguese bonds are seeing a solid bid this morning as worries of a Banco Espirito Santo default have subsided, at least for the time being. Early selling caused the 10y to test the 4.00% threshold, but action now holds -6.8bps @ 3.877%.

7:22 am - USDCAD Slips Ahead of Canadian Jobs Report:

  • The Dollar Index holds little changed near 80.10 amid an extremely quiet trade.
  • Light overnight selling provided yet another test of the key 80.00 area, but buyers once again emerged in defense of the level. 
  • EURUSD is steady @ 1.3605 after giving up its early gains. The single currency climbed to 1.3625 amid some early strength, but has reversed back onto the lows as support in the area once again comes under pressure. A breakdown puts the important 1.3500 level in play.
  • GBPUSD is flat @ 1.7130 as trade lingers near its best levels since October 2008. A sleepy session has limited action to a tight 30 pip range with neither bulls nor bears able to gain the upper hand.
  • USDCHF is unchanged @ .8925 where action continues to test resistance in the area guarded by both the 50 and 200 dma. A lack of news and data out of Switzerland means trade is left at the mercy of the euro.
  • USDJPY is flat @ 101.30. Yesterday's trade provided a test of the key 101.25 area with trade narrowly avoiding its lowest close since February. 
  • AUDUSD is +10 pips @ .9400 as a light bid holds following the stronger than expected home loans (0.0% MoM actual v. -0.6% MoM expected) data. Overall, action has been lackluster, trapped in a 30 pip range. USDCNY held @ 6.2034. 
  • USDCAD is -15 pips @ 1.0635 as action slips back towards the July lows. The 1.0600/1.0700 support band will be under scrutiny into today's employment change and unemployment rate releases.

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7:00 am - Treasuries Inch Up:

  • Treasuries hold small gains as traders begin to settle into their desks for the final session of the week. 
  • Overnight ranges were limited to their usual 3bps across most of the curve with action in the belly expanding to a 4bp range. 
  • Up front, the 2y trades -1.2bps @ 0.448% as action continues to slip off its highest levels since September. 
  • The 5y holds -0.3bps @ 1.645%. Action is testing support in the area that is guarded by both the 50 and 100 dma. 
  • The 10y is -0.7bps @ 2.525%. A breakdown of the 2.500% level puts the May lows near 2.400%2.440% in play. 
  • At the long end, the 30y trades -0.9bps @ 3.355% as action looks to push below both trendline resistance and support in the area. 
  • An unchanged curve has the 2-10-yr spread trading 207.5bps. 
  • Precious metals are off slightly with gold -$2 @ $1337 and silver -$0.02 @ $21.49. 
  • Data: Treasury budget (14). 
  • Fed Speak: Philly's Plosser (11:15), Chicago's Evans, and ATL's Lockhart (15) take part in the Sixth Annual Rocky Mountain Economic Summit.

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