Bond Traders Weekly Outlook: Two Year Rates Jump in U.S., U.K and E.U on Inflation Fears

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    Small cap stocks are outperforming, driving a 0.9% gain in the Russell 2000. Relative strength from regional bank stocks has boosted the index after PacWest Bancorp (PACW 6.36, +0.63, +11.4%) disclosed it entered into a loan purchase and sale agreement with a unit of Kennedy-Wilson Holdings (KW 15.45, +0.39, +2.6%) to sell a portfolio of 74 real estate construction loans with an approximate $2.6 billion aggregate principal balance currently outstanding.

    The SPDR S&P Regional Banking ETF (KRE) is up 1.7%.


    Early Bonds:

    U.S. Treasuries are set for a lower start, which will put the 3-yr note and longer tenors on track for their eighth consecutive day of losses. In Europe, where regional sovereign debt is also on the defensive while equity markets trade on a mostly lower note.

    Overnight action saw the release of flash Manufacturing and Services PMI readings for May with Japan’s Manufacturing PMI returning into expansion for the first time in seven months.

    In Europe, flash Manufacturing readings from Germany and the U.K. missed expectations, pointing to a deepening contraction in activity while France’s reading was ahead of estimates, but it also reflected an ongoing contraction.

    Last night’s debt ceiling meeting did not yield any immediate results, but both sides are remaining optimistic.

    Crude oil is building on yesterday’s gain while the U.S. Dollar Index is up 0.3% at 103.52.

    2-yr: +4 bps to 4.38%
    3-yr: +4 bps to 4.04%
    5-yr: +3 bps to 3.80%
    10-yr: +2 bps to 3.74%
    30-yr: +1 bp to 3.98%


    Early Bonds: Bonds seeing some curve selling with equities – all is not well with US political spectrum:

    2-yr note yield, at 4.28% earlier, down two basis points to 4.32% now.
    10-yr note yield, at 3.67% earlier, down one basis point to 3.69%.

    Hotter than expected CPI and core CPI from the U.K. European Central Bank President Lagarde repeated that she wants to see rates reach a sufficiently restrictive level.

    U.S. Treasury will follow yesterday’s strong 2-yr note sale with a $43 bln 5-yr note offering.

    Crude oil is returning to its 50-day moving average (74.43) while the U.S. Dollar Index is up 0.1% at 103.56.


    U.S. Treasuries continue trading in mixed fashion with shorter tenors holding losses while 10s and 30s sit in positive territory.

    Treasuries slipped to lows in immediate reaction to today’s batch of data, which showed in-line Personal Income growth in April and a larger than expected increase in Spending.
    However, the market began rising off lows about 90 minutes later with the long bond rising past its opening high while the 10-yr note is back near its starting level.
    Shorter tenors have also risen off their lows, but they remain in the red.


    Tokyo CPI for May and Japan’s cabinet office raised its overall economic assessment for the first time since July.
    Europe has been on the subdued side with European Central Bank policymakers maintaining that more rate hikes are on the way.
    There have been more reports of progress in debt ceiling negotiations, though the concern this morning is that House Democrats may oppose the concessions that the White House is making when it comes to spending levels.

    2-yr: +7 bps to 4.56%
    3-yr: +6 bps to 4.23%
    5-yr: +2 bps to 3.92%
    10-yr: -1 bp to 3.80%
    30-yr: -3 bps to 3.97%


    14:00 ET: Treasury market to close early


    U.S. Treasuries ended the week lower as yields on short-term government debt in the US, UK and eurozone have begun to rise again anticipating more pro
    [See the full post at: Bond Traders Weekly Outlook: Two Year Rates Jump in U.S., U.K and E.U on Inflation Fears]

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