U.S. Treasury Bond Market Remains Focused On Inflation Data

By: Levente_Mady

The bond market improved a point in the long end, as traders focused on what ultimately matters for bonds: the inflation data.  As per the comments below, the latest slew of data showed that inflation remains subdued both at the wholesale and retail level.  As a result bonds remain well supported regardless of an ongoing relentless rally in equities and other risky assets.  Last week the market traded based on the Fed meeting and the inflation data, next week the focus may shift back to the Treasury auctions again. 

This time it will be 2, 5 and 7 year bonds, but the market seems to be less and less preoccupied with the bond auctions as interest rates remain stuck in a narrow trading range.  The North American currencies seem to be the flavour of the season and they are strongly supported by massive inflows into the US and Canadian bond markets.  As long as the Chinese Renminbi peg stays in place, the American Dollars appears to be the lesser of the major evils – I mean currencies.  For further comments on the Canadian Dollar, please feel free to tune into the interview I had with the BNN TV network at the following link: http://watch.bnn.ca/clip278570#clip278570.

Just a brief follow up with regard to last week’s comments on Central Bank buying of Treasuries.  Countries that have current account surpluses with the US don’t have a choice but to invest in US Dollar denominated securities – be it Treasuries, stocks, real estate, sheep, etc. – to counterbalance those surpluses.  This is especially true about China who for the time being refuses to budge on the currency peg.  The oodles of money that flow to China can’t be recycled in their domestic economy; they actually have a completely separate universe forming with their own internal debt issues.  If China gets paid in US Dollars for their goods, they need to put those Dollars somewhere, and at the present time, it is the Chinese Government who is in charge of recycling most of that money.

Central Banks were quiet last week.  The US Federal Reserve did what was expected at its policy meeting last Tuesday.  The Fed moved about 2 inches from a most accommodating to a slightly more neutral bias at this meeting.  They clearly spelled out again that no rate hikes are expected in the foreseeable future - until September at the earliest.  That is 6 months down the road and I expect that to remain a rolling 6 months.  A number of liquidity support programs are in the winding down phase.  These will be discontinued in the context of the market reaction.  In other words, they are subject to further extensions – just like the announcements we have recently seen from the Bank of Japan and the Bank of England – depending on the market context.

NOTEWORTHY:  The economic calendar was busier last week.  Manufacturing Indexes were mixed, with the NY State data ticking down a couple of points while the Philadelphia Fed survey ticked up a point.  They both remained in positive territory and indicated further expansion in activity.  Industrial Production and Capacity Utilization both ticked up marginally, but CapU remains at recessionary levels at 72.7%.  Nothing new or shocking on the housing front as Housing Starts and Building permits declined again in February and remain at extremely depressed levels.  Both PPI and CPI surprised to the downside on the headline figures, while the core data was reported in line with expectations of a 0.1% increase on each front. 

The Weekly Initial Jobless Claims declined marginally from 462k to 457k – close to market forecasts.  Leading Economic Indicators also ticked up 0.1% in February.  In Canada, the inflation data showed that going to watch the Olympics in Vancouver was not a cheap proposition.  Canada’s Retail Sales also showed a nice bump as they rose 0.7% in January.  This week’s economic schedule will be highlighted by more housing data in the form of Existing and New Home Sales as well as Durable Goods Orders, the final release of the Q4 GDP data and the final report for March of the Michigan Consumer Sentiment Index.

INFLUENCES:  Trader sentiment surveys ticked up a notch last week.  On a scale of 0-10, the surveys I follow are very near to 5.5.  The Commitment of Traders report showed that Commercial traders were net long 309k 10 year Treasury Note futures equivalents – a decrease of 65k from the previous week.  This metric is somewhat supportive.  Seasonal influences are negative to the end of May.  The technical picture remains neutral as the Long Bond continues to aimlessly chop sideways, testing resistance at 118.  We are sticking with our neutral bias here.

RATES:  The US Long Bond future traded up a point to 117-29, while the yield on the US 10-year note decreased 1 basis point to 3.69% over the last week.  The Canadian 10 year yield decreased 5 basis points to 3.49%.  The Canada-US 10 year spread moved out 4 bps as the Canadian 10 Year yield was 20 basis points below the US 10 Year Treasury yield.  The US yield curve was 4 basis points flatter with the difference between the 2 year and 10 year Treasury yield now at 270.

BOTTOM LINE:  Bond yields were either side of unchanged across all maturities last week, while the yield curve was slightly flatter again.  The fundamental backdrop remains supportive.  Trader sentiment is neutral; support provided by the Commitment of Traders data is positive while seasonal influences are negative.  Based on this info, we are stuck in neutral mode.  Stay long and earn the carry!

By Levente Mady
lmady@mfglobal.com
www.mfglobal.ca

The data and comments provided above are for information purposes only and must not be construed as an indication or guarantee of any kind of what the future performance of the concerned markets will be. While the information in this publication cannot be guaranteed, it was obtained from sources believed to be reliable.  Futures and Forex trading involves a substantial risk of loss and is not suitable for all investors.  Please carefully consider your financial condition prior to making any investments.

MF Global Canada Co. is a member of the Canadian Investor Protection Fund.

© 2010 Levente Mady, All Rights Reserved

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.