Bond Traders Weekly Outlook: Continued Under Performance By 2-yr Note

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    U.S. Treasuries mixed start with long bond early weakness while shorter tenors closer to flat lines after a quiet night in the futures market.

    Overnight action saw the release of data, including better than expected retail sales from Japan and Australia and below-consensus industrial production from Japan.

    In Europe, flash February inflation readings from France and Spain were hotter than expected, which is solidifying expectations for a 50 bps March hike from the European Central Bank.

    Crude oil is rising back to its 50-day moving average (77.63)
    U.S. Dollar Index is little changed at 104.67.

    2-yr: UNCH at 4.80%
    3-yr: UNCH at 4.51%
    5-yr: UNCH at 4.17%
    10-yr: +1 bp to 3.93%
    30-yr: +2 bps to 3.94%


    U.S. Treasuries ended February paced by the 2-yr note, compressed 2s10s spread by 20 bps to -88 bps.
    Close & bps change for the month:
    2-yr +59 bps
    3-yr 4.51%+59 bps
    5-yr 4.17% +53 bps
    10-yr 3.92% +39 bps
    30-yr 3.93% +27 bps


    U.S. Treasuries started March with a midweek retreat that was paced by shorter tenors.

    The Treasury complex faced pressure from the start after overnight action was headlined by the release of China’s Manufacturing PMI (actual 52.6; expected 50.5), which hit its best level since 2012. The report overshadowed contractionary readings from Japan (actual 47.7; expected 47.4) and the eurozone (actual 48.5, as expected) while the February ISM Manufacturing Index for the U.S. improved (actual 47.7%; consensus 47.8%; prior 47.4%) but remained in contractionary territory.

    Treasuries began widening their losses shortly after the start, accelerating to fresh lows after today’s second batch of data, which included the ISM Manufacturing Index.

    In addition, the market responded to hawkish comments from Minneapolis Fed President Kashkari, who is a voter on the FOMC this year, and said that wage growth is too high, and that inflation must be cooled.

    The Treasury complex reached lows around 11:00 ET while the next hour saw a rebound that was paced by the long bond while shorter tenors resisted, remaining closer to their lows.

    Today’s selling lifted the 10-yr yield to its highest level since early November while the 30-yr yield touched its highest level since December 30 (3.984%) but finished a bit below that mark

    2-yr: +10 bps to 4.90%
    3-yr: +11 bps to 4.62%
    5-yr: +10 bps to 4.26%
    10-yr: +8 bps to 3.99%


    Treasury yields moved noticeably higher following the data releases.

    Q4 productivity was revised down to 1.7% (consensus 2.5%) from the preliminary estimate of 3.0%. Unit labor costs, meanwhile, were revised up to 3.2% ( consensus 1.4%) from 1.1%.

    The key takeaway from the report is the elevated unit labor costs, which were up 6.3% from the same quarter a year ago (which is when the Fed first started raising rates). Moreover, unit labor costs in the nonfarm business sector were up 6.5% in 2022, which is the largest annual increase since 1982.

    The 2-yr note yield is up four basis points to 4.94% and the 10-yr note yield is up seven basis points to 4.07%.

    2-yr: +4 bps to 4.94%
    3-yr: +4 bps to 4.66%
    5-yr: +8 bps to 4.34%
    10-yr: +8 bps to 4.07%
    30-yr: +8 bps to 4.03%


    U.S. Treasuries sold off all week until Friday. At one point the entire curve was over 4%. Friday saw a reversal lifting the long bond into positive t
    [See the full post at: Bond Traders Weekly Outlook: Continued Under Performance By 2-yr Note]

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