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Bond Market Commentary

Updates on bond market data, news, and activity each day.

May 27, 2022

Over in bond land, Treasuries are strengthening ahead of the opening bell Friday as investors await a flurry of economic reports ahead of the long holiday weekend. The yield on the benchmark 10-year note is down three basis points (0.03%) to 2.72%, on track to end the week six basis points (0.06%) lower and having declined 20 basis points (0.20%) month-to-date. The yield on the 30-year bond is slipping four basis points (0.04%) to 2.94%, five basis points (0.05%) below last Friday’s (May 20) close and down by the same amount from a monthly perspective. On the short end of the curve, the yield on the two-year note is off two basis points (0.02%) to 2.46%, headed for a 13-basis point (0.13%) drop on the week and positioned to slide 27 basis points (0.27%) in May. On the data front, the core PCE deflator (the Federal Reserve’s (Fed) preferred proxy for inflation) is forecasted to have advanced 4.9% year-over-year in April, easing slightly from the previous 5.2% annual gain. A softer figure would fit in with the peak inflation narrative that has gained some traction on Wall Street in recent weeks. Separately, personal spending is projected to have climbed 0.8% in April after jumping 1.1% in the prior month, while personal income likely rose 0.5% during the same period. Additionally, a final May reading from the University of Michigan is anticipated to confirm consumer sentiment fell to the lowest level since 2011 at 59.1. Rounding out the docket, a preliminary April print on wholesale inventories is expected to reflect a 2% increase, while the advance goods trade deficit for the month likely narrowed to reflect a $114.8 billion shortfall.

Yesterday, Treasuries were little changed despite U.S. equity markets extending this week’s bounce. Another wave of data reports were in focus. A second reading of first-quarter U.S. GDP (Gross Domestic Product) was downwardly revised to indicate the economy contracted at a 1.5% annualized pace during the January-March period (compared with an initially reported 1.3% decline). This followed a growth rate of 6.9% in the fourth quarter of 2021. It remains the worst GDP print since spring 2020, reflecting a widening trade deficit. Separately, weekly initial jobless claims came in at 210,000, easing from the prior 218,000 figure that had marked the highest level since January. Another release revealed pending home sales fell for a sixth straight month, the worst streak since 2018. The reading reflected a worse-than-anticipated 3.9% drop, the sharpest slide in almost a decade. Rounding out the docket, an update from the Kansas City Fed showed manufacturing activity in the region eased modestly in May, with the gauge dipping to 23 from the previous 25 print. In the auction space, the U.S. Treasury Department sold $42 billion in seven-year notes at a high yield of 2.777% on Thursday. Demand was described as very strong, with the sale stopping nearly 2.5 basis points (0.025%) through the when-issued yield. Additionally, the bid-to-cover ratio (an indicator of demand) came in at 2.69, constituting the highest reading since March 2020 and 2.5 standard deviations above the one-year average. Indirect bidders (a proxy for foreign demand) accounted for 77.9% of the smallest sale since June 2020--the strongest ratio since early 2018. Dealers were left with only 6.4% of the issue, the lowest on record, according to Bloomberg.

Fixed mortgage rates decreased for a second consecutive week, according to the Freddie Mac Primary Market Mortgage Survey® (PMMS®). For the week ending May 26, 2022, the 30-year fixed rate dropped 15 basis points (0.15%) to 5.10%, the sharpest decline since April 2020. The 30-year rate touched the highest level since July 2009 two weeks ago (5.30%). Despite the recent moderation, this compares to a 2.95% level a year ago, and the record low of 2.65% touched in January 2021. The rapid back-up in rates over the last four months has started to pressure homebuyer demand, slowing the housing market. Notably, Bloomberg highlighted that the number of home sellers reducing listing prices reached the highest level since October 2019. Meanwhile, the 15-year fixed mortgage rate fell 12 basis points (0.12%) to 4.31% in the latest week, versus 2.27% a year ago. Five-year Treasury-indexed hybrid adjustable-rate mortgages averaged 4.20%, 12 basis points (0.12%) higher from the prior week and compares to 2.59% at this time last year.

Municipal Market Commentary

The Bloomberg 30-day visible supply fell $216 million to $8.724 billion on Thursday, below the 12-month average of $11.803 billion.

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