Bond Market Commentary

June 21, 2021

Treasuries are mixed ahead of the opening bell on Monday, as investors await comments from Federal Reserve officials. Today, New York Fed President John Williams, St. Louis Fed President James Bullard, and Dallas Fed President Robert Kaplan are all set to speak today. The focus will likely remain on comments from policymakers as a slew of Fed leaders will deliver remarks at various engagements throughout the week, including Fed Chair Jerome Powell on Tuesday afternoon, as he testifies before Congress on the central bank's COVID-19 response.

This morning, the yield on the benchmark 10-year note is little changed at 1.44%, steadying after dipping to 1.35% in overnight trading, which was the lowest since late February. The yield on the 30-year bond is up one basis point to 2.02%, recovering after dipping below the 2% threshold for the first time since February in earlier trading. On the shorter-end of the curve, the yield on the two-year note is adding one basis point to 0.26%.

Last Friday, the Treasury yield curve continued to flatten, with longer-dated yields extending their declines as investors assessed perceived "hawkish" comments from St. Louis Federal Reserve President James Bullard. He noted that high inflation may warrant the U.S. central bank to begin raising rates in late 2022, earlier than the Fed's median projections calling for two rate hikes in 2023. Treasuries were mixed on Friday, with the yield on the more Fed-sensitive two-year note jumping four basis points to 0.25% to cap a 10 basis point surge for the week. The 10-year note rate fell seven basis points to 1.44%, retracting its mid-week spike following the Federal Reserve meeting and ending one basis point lower from a week earlier. The yield curve between the 10- and two-year Treasuries narrowed to the lowest since February. Meanwhile, the spread between the five- and 30-year Treasury yields flattened to 111 basis points, the smallest gap since September, and compares to 140 basis points before the Fed meeting last Wednesday.

On the data front today, the lone update from the Chicago Fed is expected to show national economic activity grew modestly faster in May compare to April.

Later this week, research firm IHS Markit will release preliminary June readings on both manufacturing and services sector activity from around the globe (Wednesday). Last month, Markit's purchasing managers' index (PMI) print on the U.S. services sector climbed to the highest on record (70.4), indicating expansion for a 10th consecutive month. Additionally, an update on the core PCE deflator (the Fed's preferred proxy for inflation) will likely garner attention on Friday after the measure spiked 3.1% year-over-year in April, the biggest jump since July 1992. Investors will also get updates on personal income and spending, new and existing home sales, readings on wholesale inventories, durable and capital goods orders, weekly unemployment claims, and a final print on U.S. first-quarter GDP.

On the auction front, the U.S. Treasury will sell $57 billion of three-month T-bills and $54 billion of six-month T-bills.

Mortgage rates continued to decline in the most recent week, with the 30-year fixed rate falling to its lowest level since February 18, according to the Freddie Mac Primary Market Mortgage Survey® (PMMS®). Rates continued to drift lower as market participants began to view the recent increases in inflation to be transitory. For the period ending June 17, 2021, the 30-year fixed rate fell three basis points to 2.93%. This compares to 3.13% at this time last year and to its record low of 2.65% reached in early January. The 15-year fixed mortgage rate ticked up one basis point to 2.24%, versus 2.58% a year ago. Five-year Treasury-indexed hybrid adjustable-rate mortgages averaged 2.52%, three basis points lower from the prior week and compares to 3.09% at this time last year.

The Bloomberg 30-day visible supply fell $403 million to $12.486 billion on Friday, above the 12-month average of $12.183 billion.

This information is obtained from sources and data considered to be reliable, but its accuracy and completeness is not guaranteed by Wells Fargo Advisors.

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