YIELDS

The long end of the Treasury market rallied a few bp Tuesday while the front end was little changed, sending the curve back lower after the bear steepening reversal last week. After falling to a nine-year low of 75 bp on July 8, a level flat enough to raise some warning signals for the economy in a near zero policy rate environment, 2’s-10’s rebounded to a two and a half week high of 90 bp Monday, but moved back down to 87 bp after Tuesday’s renewed bid in the longer end of the curve. It was a quiet news day, and there wasn’t much behind the latest moves, with our Treasury desk seeing another day of very light flows after the very quiet activity Monday. Our swaps desk did note a bit of foreign real money receiving, which has been a persistent source of demand in the plunge in yields to record lows in the past month. A mixed housing starts report, upside in June but from a downwardly revised May reading, didn’t change our 2.3% Q2 GDP growth estimate and had only a small, temporary negative market impact.
Another round of cuts in the IMF’s economic forecasts, meanwhile, added a bit of negativity to views on the outlook, but it would be hard to be surprised by the IMF lowering their estimates again, since (like the FOMC) the IMF has had a persistently overoptimistic outlook throughout the post-recession period. Their lowered forecasts still look too high to us, and we expect they’ll be cut again next time.

At 3:00, benchmark Treasury yields were flat to down 3 bp and the curve flatter after another light summer trading session on a quiet news day. The 2-year yield ended little changed at 0.69%, while the 3-year yield fell 1 bp to 0.83%, 5-year 1.5 bp to 1.11%, 7- year 2.5 bp to 1.38%, 10-year 3 bp to 1.56%, and 30-year 3 bp to 2.27%. Gains in nominals all came in lower inflation expectations in a rough day for TIPS that saw the 5-year inflation breakeven drop 4 bp, 10-year 3 bp, and 30-year 3 bp. The 10-year TIPS auction on Thursday contributed to the poor performance along with 1% drops in oil and gasoline futures prices and a broad rally in the trade-weighted dollar, including a new high in USD/CNY, the largest component, above 6.70. Against the marginally more hawkish near-term Fed pricing in futures, eurodollar gained up to 2.5 bp further out the curve along with the flattening in Treasuries. Housing starts were better than expected in June, but the upside was offset by downward revisions to May and April.

EM BONDS