Bond Market Update from Briefing.com

3:39 pm - Treasuries Decline but Shrug at Fed

  • U.S. Treasuries sold off this morning and were virtually unaffected by the strong results of the 5-year note auction or the release of the Fed decision and accompanying statement
  • Yield Check:
    • 2-yr: +3 bps to 0.70%
    • 5-yr: +2 bps to 1.61%
    • 10-yr: +3 bps to 2.28%
    • 30-yr: +3 bps to 2.99%
    • News:
      • The MBA Mortgage Index for the week ending 07/25 rose 0.8% in the week to July 25th versus a 0.1% gain in the prior week
      • The National Association of Realtors' Pending Home Sales Index fell 1.8% in June versus the Briefing.com consensus of +1.0%. The index rose 0.6% in May (revised from 0.9%)
      • The $35 bln 5-year note auction was met with strong demand, as the high yield was 1.0 bp below where the when-issued market anticipated at 12:59 ET
        • High yield 1.625%
        • Bid-to-cover 2.58
        • Indirect bid 67.5%
        • Direct bid 5.3%
      • The FOMC left interest rates unchanged, as expected. The committee made only minor (but positive) changes to its assessment of the economy
        • The statement read "underutilization of labor resources has diminished" whereas in recent meetings it read, "underutilization of labor resources has somewhat diminished"
        • Instead of reading, "The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market," today's statement read, ""The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market"
          • Commodities:
            • WTI Crude: +1.75% to $48.82/bbl.
            • Gold: -0.05% to $1,095.70/troy oz.
            • Copper: +0.33% to $2.41/lb.
            • Currencies:
              • EUR/USD: -0.78% to $1.0983
              • USD/JPY: +0.27% to 123.91
              • Data out Thursday:
                • Initial Jobless Claims for the week ending 7/25 and Continuing Jobless Claims for the week ending 7/18 (08:30 ET)
                • Q2 GDP and Chain Deflator - Advanced Estimate (08:30 ET)
                • Natural Gas Inventories for the week ending 7/25 (10:30 ET)
              • Treasury Auction:
                • $29 bln 7-year note auction (results at 13:00 ET)
                • 3:07 pm - Dollar Edges Higher After Fed Decision

                  • The U.S. Dollar Index rallied 0.22% to 96.99 after the FOMC left rates on hold, as expected, and made only very subtle changes to the statement
                  • EUR/USD: -0.59% to $1.1004
                    • In Germany, the GfK German Consumer Climate Index was flat in August at 10.1, in line with forecasts
                    • Retail Sales in Spain rose a less-than-expected 2.3% y/y in June, versus a 3.1% jump in May
                    • French Consumer Confidence unexpectedly fell in July to 93, from 94 in June
                  • GBP/USD: -0.03% to $1.5607
                  • USD/JPY: +0.30% to 123.94
                    • In Japan, Retail Sales fell less than expected, down 0.8% m/m in June
                    • USD/CHF: +0.49% to 0.9663
                      • In Switzerland, the Consumption Indicator rose to a lower-than-expected 1.68 in June from 1.62 in May
                      • USD/CAD: +0.05% to 1.2936
                        • The loonie ripped higher after the crude oil inventory data showed a bigger-than-expected draw-down last week, but then relinquished its gains after traders bought dollars on the FOMC statement
                        • AUD/USD: -0.62% to $0.7297
                        • NZD/USD: -0.60% to $0.6670
                        • 2:27 pm - Somewhat Diminished => Diminished

                          • Bloomberg notes that previously the statement read, 'underutilization of labor resources has diminished'
                            • In the past, the statement said "underutilization of labor resources has somewhat diminished"
                          • Yield Check:
                            • 2-yr: +3 bps to 0.70%
                            • 5-yr: +1 bp to 1.60%
                            • 10-yr: +2 bps to 2.27%
                            • 30-yr: +2 bps to 2.98%
                            • 2:22 pm - Injection of the Word "Some"

                              • There was not much to see in this Fed statement, so here's this: Ryan Littlestone at Forexlive is saying that the change from this: "The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market"
                              • to this: "The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market" means that we're closer to a rate hike, which was expected anyway because time has passed between the last meeting and this one. This was clearly no indication that September is the meeting for liftoff
                              • The bottom line is that there is no clear message in this statement and any meaningful reaction will be based upon positioning rather than something in the statement

                              2:11 pm - Treasuries Mostly Unchanged on Fed

                              • Information received since the Federal Open Market Committee met in June indicates that economic activity has been expanding moderately in recent months. Growth in household spending has been moderate and the housing sector has shown additional improvement; however, business fixed investment and net exports stayed soft. The labor market continued to improve, with solid job gains and declining unemployment. On balance, a range of labor market indicators suggests that underutilization of labor resources has diminished since early this year. Inflation continued to run below the Committee's longer-run objective, partly reflecting earlier declines in energy prices and decreasing prices of non-energy imports. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations have remained stable
                              • Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to remain near its recent low level in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of earlier declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely
                              • To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term
                              • The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions
                              • When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run
                              • Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Jeffrey M. Lacker; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams

                              1:05 pm - Treasury Auction Results

                              • The $35 bln 5-year note auction was met with strong demand, stopping through by 1.0 bps:
                                • Auction results:
                                  • High yield: 1.625%
                                  • Bid-to-cover: 2.58
                                  • Indirect bid: 67.5%
                                  • Direct bid: 5.3%
                                • Prior 12-auction average results:
                                  • High yield: 1.57%
                                  • Bid-to-cover: 2.55
                                  • Indirect bid: 56.5%
                                  • Direct bid: 9.7%
                                  • 12:36 pm - Bond Shows Relative Strength

                                    • Treasuries are at or near their lows of the session ahead of the $35 billion 5-year note auction
                                    • JPM Morgan released its Duration Survey yesterday and it showed that for all clients, there were the fewest net shorts since February 23, 2015. For active clients, there were the fewest net shorts since May 26, 2015
                                    • Gavyn Davies, former chief economist at Goldman Sachs, wrote about Fed tightening cycles on his blog on July 19th. The commentary is still relevant today: "Although economic forecasters are expecting a September lift off, this starting date is still not fully priced into Fed funds futures. What really matters, however, is whether the Fed then embarks on a medium term tightening path that persistently surprises the markets in a hawkish direction...That is what has happened in each of the three previous tightening cycles, which were periods when fixed income traders consistently lost money by taking long positions at the front end of the yield curve. The current market pricing for forward short rates, which remains far below the Fed's 'dots' for the next three years, suggests that there is a strong possibility that this accident could repeat itself in the coming tightening cycle."
                                    • Yield Check:
                                      • 2-yr: +5 bps to 0.72%
                                      • 5-yr: +4 bps to 1.63%
                                      • 10-yr: +4 bps to 2.29%
                                      • 30-yr: +3 bps to 3.00%

                                      12:03 pm - Auction Preview

                                      • $35 bln 5-year note auction:
                                        • Prior auction results:
                                          • High yield: 1.71%
                                          • Bid-to-cover: 2.39
                                          • Indirect bid: 57.2%
                                          • Direct bid: 5.56%
                                        • Prior 12-auction average results:
                                          • High yield: 1.57%
                                          • Bid-to-cover: 2.55
                                          • Indirect bid: 56.5%
                                          • Direct bid: 9.7%
                                          • 11:45 am - Tplex Falls Despite Looming FOMC

                                            • Government notes and bonds are being sold this morning as investors aren't waiting for the FOMC to take off risk in rates
                                            • The FOMC will meet at 2:00 ET
                                              • The Fed is likely to reiterate its data-dependency language in the statement, but any indication that September is more likely than December will affect fixed-income markets adversely. The market has priced in a 19% chance of a rate hike in September
                                            • Before the Fed, there is a $35 bln 5-year note auction with the results reported at 13:00 ET
                                            • Yield Check:
                                              • 2-yr: +4 bps to 0.71%
                                              • 5-yr: +3 bps to 1.62%
                                              • 10-yr: +3 bps to 2.28%
                                              • 30-yr: +3 bps to 2.99%
                                              • 11:24 am - What, If Anything, Will the Fed Signal?: The Dollar Index is holding steady as we prepare for today's Fed announcement. The DXY has been trading in the 96.49-96.88 area. The Fed is not expected to make any moves today but markets will be closely following the commentary for clues on the next direction. The economy, inflation, and jobs will all be in focus. Any hint of a more hawkish Fed will lead to higher expectations of a September rate hike. So far economists are on board but markets are still pointing toward only a 20% chance of a hike. The Fed will try to keep the comment as unambiguous as possible so that it can remain data dependent.

                                                • The euro is coming under some early selling pressure ahead of the event as it prepares to test 1.10 for support. The euro is simply taking its lead from the dollar at the moment. The market will be paying close attention though in case a more dovish Fed fails to inspire buying in the single currency. This could lead to further downward momentum in the euro.
                                                • The pound is under some intense pressure to start off the session. Sterling was trading at 1.5690 but once again failed to break above 1.57 resistance. This has led to steady selling over the past hour. Cable has dropped a quick 50 pips.
                                                • The yen has been sliding lower in early trade here but remains in that 123-124 area. Yen has stayed in the 123 area for the entire week.

                                                10:51 am - Treasuries Continue Lower

                                                • The Treasury complex remains broadly lower this morning as oil has reversed higher after its weekly supply number
                                                  • Crude inventories for the week ending July 25th fell by 4.203 mln barrels versus the prior week's build of 2.468 mln barrels
                                                • Yield Check:
                                                  • 2-yr: +4 bps to 0.70%
                                                  • 5-yr: +3 bps to 1.62%
                                                  • 10-yr: +3 bps to 2.29%
                                                  • 30-yr: +2 bps to 2.99%
                                                  • The 5-year note yield is trading near its 21-day and 50-day moving averages at 1.627% and 1.633%, respectively
                                                  • 10:12 am - Pending Home Sales Unexpectedly Drop

                                                    • The National Association of Realtors' index of pending home sales declined to a seasonally-adjusted 110.3 in June, down 1.8% from the reading of 112.3 in May. The Briefing.com consensus was for a gain of 1.0%
                                                    • The Treasury complex has not reacted with much enthusiasm to the release
                                                    • IMF Managing Director Christine Lagarde is holding a virtual press conference (first ever). She said that: 
                                                      • The global economic recovery is "a little bit too tepid"
                                                      • China's economy is resilient, and she noted that its stock market is still up 80+% from a year ago
                                                      • A rescue plan for Greece would require "four legs"
                                                        • realistic fiscal targets
                                                        • structural reforms
                                                        • sufficient financing
                                                        • debt restructuring
                                                      • Yield Check:
                                                        • 2-yr: +3 bps to 0.70%
                                                        • 5-yr: +2 bps to 1.61%
                                                        • 10-yr: +3 bps to 2.28%
                                                        • 30-yr: +2 bps to 2.98%
                                                        • 9:42 am - 30-Year Bond Outperforms

                                                          • Treasury coupon securities are trading towards lows at the moment, except for the 30-year which has stabilized in a range
                                                          • U.S. equity indices opened slightly to the upside, with the S&P 500 up 0.19% to 2,097.16
                                                          • Yield Check:
                                                            • 2-yr: +3 bps to 0.70%
                                                            • 5-yr: +2 bps to 1.61%
                                                            • 10-yr: +2 bps to 2.27%
                                                            • 30-yr: +1 bp to 2.98%
                                                          • June Pending Home Sales will be released at 10:00 ET. The Briefing.com consensus is for a gain of 1.0% versus the May reading of 0.9%
                                                          • 8:39 am - "Markets Are Quite Fragile"

                                                            • Sir John Cunliffe, a deputy governor for financial stability at the Bank of England, warned today that there is low liquidity in financial markets and that "this must be the most advertised, well-signaled change in monetary policy in the history of man."
                                                              • Many central bankers around the world are concerned about removal of the Fed's 7-year zero interest-rate policy (ZIRP)
                                                              • While Cunliffe wants more transparency, the FOMC has been sticking to its mantra of "data dependence" so as not to tie its own hands if the growth and/or inflation outlooks change rapidly
                                                            • In Greece, there is growing speculation that former Finance Minister Yanis Varoufakis may face criminal charges for his plans to develop a parallel financial system back in December 2014. He is immune from prosecution while he remains an MP
                                                            • Yield Check:
                                                              • 2-yr: +3 bps to 0.70%
                                                              • 5-yr: +2 bps to 1.61%
                                                              • 10-yr: +2 bps to 2.27%
                                                              • 30-yr: +2 bps to 2.98%
                                                              • 8:12 am - Sovereign Yields All Higher

                                                                • European sovereign debt sold off today despite disappointing Spanish retail sales data and consumer confidence in France. The equity rally that began yesterday morning in the U.S. has affected European indices as well, albeit to a lesser extent, and that risk appetite has sapped demand for European sovereigns. The 10-yr German Bund yield has been finding support around 0.60% and resistance around 1.00% over the past several weeks
                                                                • French Consumer Confidence unexpectedly fell in July to 93, from 94 in June
                                                                • Retail Sales in Spain grew only 2.3% y/y in June, less than expected and less than the 3.1% growth seen in May
                                                                • The German GfK Consumer Climate Index was 10.1 in August, in line with expectations and the prior month's reading
                                                                • There is now talk that Greece will need a bridge loan to make its 3.2 bln euro payment to the ECB on August 20th as a third bailout may not be agreed by that time
                                                                • Yield Check:
                                                                  • France, 10-yr OAT: +4 bps to 1.02%
                                                                  • Germany, 10-yr Bund: +3 bps to 0.68%
                                                                  • Greece, 10-yr note: +37 bps to 12.06%
                                                                  • Italy, 10-yr BTP: +2 bps to 1.90%
                                                                  • Portugal, 10-yr note: unch at 2.51%
                                                                  • Spain, 10-yr ODE: +3 bps to 1.95%
                                                                  • U.K., 10-yr Gilt: +4 bps to 2.00%

                                                                  7:26 am - Yields Move Higher

                                                                  • U.S. Treasury coupon securities fell overnight as global equities edged higher ahead of the FOMC's rate decision this afternoon
                                                                  • Yield Check:
                                                                    • 2-yr: +3 bps to 0.70%
                                                                    • 5-yr: +3 bps to 1.62%
                                                                    • 10-yr: +2 bps to 2.27%
                                                                    • 30-yr: +2 bps to 2.99%
                                                                    • International News:
                                                                      • In Japan, Retail Sales fell less than expected, down 0.8% m/m in June
                                                                        • Many forecasters are predicting negative growth in the second quarter. GDP data for Q2 will be released on August 17th
                                                                      • The MBA Mortgage Index for the week ending 07/25 rose 0.8% versus +0.1% in the week prior
                                                                      • In Germany, the GfK German Consumer Climate Index was flat in August at 10.1, in line with forecasts
                                                                      • Retail Sales in Spain rose a less-than-expected 2.3% y/y in June, versus a 3.1% jump in May
                                                                      • Greece and its creditor institutions agreed on a FY 2015 GDP growth forecast of -3.3% 
                                                                        • Greece owes the European Central Bank 3.2 bln euro on August 20th
                                                                          • Data out Today:
                                                                            • June Pending Home Sales (10:00 ET)
                                                                            • Crude Inventories for the week ending 7/25 (10:30 ET)
                                                                            • July FOMC Rate Decision (14:00 ET)
                                                                          • Auctions:
                                                                            • $35 bln 5-year note auction (results at 13:00 ET)
                                                                            • $15 bln 2-year floating rate note auction (results at 13:00 ET)
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