Bond Traders Weekly Outlook: Key 2s10s Treasury Spread Compressed 50% In Second Quarter

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    U.S. Treasuries higher start looking for a continuation of their rally from Friday.

    Treasury futures rally accelerated once the focus shifted to action in Europe. European Central Bank policymakers are increasingly concerned about second-round effects of inflation and a wage-price spiral taking hold. Bank for International Settlements called for more rate hikes, warning that the fight against inflation is at a critical juncture.

    There were reports of a coup attempt by the Wagner Group in Russia, but the group’s leader reportedly accepted a deal to move to Belarus. Economic data released overnight showed Germany’s Business Climate Index from the ifo falling to its lowest level of the year while the U.S. session will not feature any data. However, the U.S. Treasury will sell $42 bln in 2-yr notes this afternoon. Crude oil is looking to recover some of last week’s loss while the U.S. Dollar Index is down 0.2% at 102.70.

    2-yr: -3 bps to 4.72%
    3-yr: -4 bps to 4.29%
    5-yr: -6 bps to 3.94%
    10-yr: -5 bps to 3.69%
    30-yr: -4 bps to 3.78%


    U.S. Treasuries mostly flat start in most tenors while the 2-yr note is expected to show relative strength in the early going.

    2-yr note climbed last evening, and it continues hanging onto its gain this morning. The market received a limited dose of economic data, but it is worth noting that Chinese banks reportedly intervened in the currency market to support the yuan after the currency reached its lowest level against the dollar since late November.

    In Europe, expectations are firming for another ECB rate hike in September, as policymakers speak at the two-day Sintra conference, where Fed Chairman Powell will deliver a speech tomorrow.

    Crude oil is sliding back toward last week’s low while the U.S. Dollar Index is down 0.1% at 102.55.

    2-yr: -6 bps to 4.68%
    3-yr: +1 bp to 4.31%
    5-yr: UNCH at 3.96%
    10-yr: UNCH at 3.72%
    30-yr: -1 bp to 3.81%


    Treasuries have not responded well to this morning’s data.

    The 2-yr note yield is up 15 basis points to 4.87%, hurt by the specter of the Fed staying on a tightening path, and the 10-yr note yield is up 13 basis points to 3.84%, sensing that the effort to get inflation back down to 2.0% is going to be a difficult one. Yesterday, Fed Chair Powell said he doesn’t think core inflation will be back to 2.0% until 2025.

    The third estimate for Q1 GDP saw a strikingly large, upward revision to 2.0% from 1.3% (consensus 1.3%), as consumer spending proved to be stronger than thought, while the GDP Deflator was revised down to 4.1% from 4.2% ( consensus 4.2%). Granted this is a backward-looking report, yet the key takeaway is that it underscores how the strength of the labor market fueled consumer spending in the first quarter and helped forestall any recession-like trajectory in the U.S. economy.

    Initial jobless claims for the week ending June 24 decreased by 26,000 to 239,000 (consensus 266,000) while continuing jobless claims for the week ending June 17 decreased by 19,000 to 1.742 million. In the recessions seen since 1980, initial jobless claims have averaged north of 375,000, so the key takeaway from today’s report is that the labor market continues to be resilient, which is a good portent for the economy.

    The CME FedWatch Tool shows an 89.3% probability of a 25-basis points rate hike to 5.25-5.50% at the July FOMC meeting, versus 81.8% yesterday. Notably, though, there has been an uptick in expectations for another rate hike at the September FOMC meeting. It is still not the expected outcome, yet the probability of a second rate hike has risen to 25.0% from 16.4%.


    U.S. Treasuries lows after sharp upward revision to Q1 GDP & unexpected drop in jobless claims

    The post-data retreat has lifted yields on the 5-yr note and shorter tenors to fresh highs for the month while the 10-yr yield is now within a basis point of its high from June 14 (3.851%).

    The data led to an uptick in rate hike expectations, though even with today’s 140 bps increase, the implied likelihood of a second rate hike at the September meeting remains below 50.0%, currently hovering at 26.8%. Equities started the day near their flat lines, but they are rising off those levels with the S&P 500 currently up 0.1%.

    2yr +15 bps to 4.87%
    3yr +14 bps to 4.48%
    5yr +16 bps to 4.13%
    10yr +13 bps to 3.84%
    30yr +10 bps to 3.90%


    U.S. Treasuries closed out the second quarter with yields on the 10-yr note and shorter tenors near levels not seen since the first half of March. On
    [See the full post at: Bond Traders Weekly Outlook: Key 2s10s Treasury Spread Compressed 50% In Second Quarter]

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