Bond Market Commentary

In bond land, Treasuries are slightly weaker ahead of the opening bell Friday, giving up some of this week’s rally. Government securities have caught a bid in recent days as worries around a potential economic pullback have taken center stage. Risk sentiment remains fragile on concerns the Federal Reserve (Fed) could inadvertently tip the U.S. economy into a recession as recent remarks from central bank leaders have reiterated their commitment to combatting inflation. The yield on the benchmark 10-year note is up two basis points (0.02%) to 3.11%, though still on course to drop 12 basis points (0.12%) on the week. The yield on the two-year note is rising four basis points (0.04%) to 3.06%, but still positioned to have fallen 10 basis points (0.10%) since last Friday’s (June 17) close. The yield on the 30-year bond is advancing three basis points (0.03%) to 3.23%, set to have slipped five basis points (0.05%) on the week.

On the data front this morning, a final June reading (due at 10:00 a.m. ET) from the University of Michigan is expected to confirm consumer sentiment fell to a record low of 50.2. Separately, new home sales are projected to have dipped 0.2% in May after sliding 16.6% during the prior month. In central bank news, St. Louis Fed President James Bullard and San Francisco Fed President Mary Daly are each slated to deliver remarks at separate engagements today.

Yesterday, Treasuries strengthened as a cautious tone prevailed amid disappointing economic reports. Preliminary readings of U.S. business activity from S&P Global revealed growth in the manufacturing and services sectors slowed more than anticipated in June. However, both updates showed some signs of softening input price inflation. Separately, a report from the Kansas City Fed indicated manufacturing activity in the region eased this month, with the gauge falling to 12 from the previous 23 print. Rounding out the docket, weekly initial jobless claims came in at 229,000, still underscoring a tight labor market. Additional comments from Fed Chair Jerome Powell were also in focus during his second day of congressional testimony. Powell reiterated the Fed’s “unconditional” commitment to battling the highest inflation in over four decades, and noted officials would be hesitant to lower rates until there was clear evidence of easing price pressures. On Wednesday, the Fed chief acknowledged the risk of a recession as engineering a soft landing was proving to be “significantly more challenging,” and that policymakers would continue to make decisions on a meeting-by-meeting basis. In the auction space, the U.S. Treasury Department sold $18 billion in five-year TIPS (Treasury Inflation Protected Securities) on Thursday at a high yield of 0.362%, versus May’s -0.340% level. The bid-to-cover ratio (an indicator of demand) came in at 2.61, below the previous 2.73 figure, though demand was described as decent, given the positive real yield. Indirect bidders (a proxy for foreign demand) accounted for 83.9% of the sale, slightly below April’s record high, but still the third-highest reading in history, indicating protection against ongoing price pressures remains prevalent.

Mortgage rates have continued their ascent to the highest levels since 2008 in the latest week, according to Freddie Mac Primary Market Mortgage Survey® (PMMS®). For the week ending June 23, 2022, the average 30-year fixed rate rose three basis points (0.03%) to 5.81%, versus 3.02% a year ago and a record low of 2.65% in January 2021. The 15-year rate advanced to 4.92%, up 11 basis points (0.11%) from the prior week. This marks a peak not seen since 2009 and compares to 2.34% a year ago. Five-year Treasury-indexed hybrid adjustable-rate mortgages averaged 4.41%, increasing eight basis points (0.08%) from the prior week, and compares to 2.53% a year ago. As the Fed pursues a soft landing for the economy, mortgage rates are expected to continue rising, with the central bank enacting its most aggressive monetary policy tightening in recent decades to combat inflation.

The Bloomberg 30-day visible supply fell $659 million to $11.039 billion on Thursday, below the 12-month average of $11.522 billion.

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