Investors Brace for More Treasury Supply and May CPI

  • Two factors will probably drive most of the price action this week and that’s long-end Treasury supply coming to auction and on Friday the May CPI report.


  • Testing the latest trading range will be a trio of Treasury auctions with $32 billion in 3yr notes being sold tomorrow, $21 billion in 10yr notes Wednesday, and $13 billion in 30yr bonds on Thursday. The long duration-focused supply will probably need concessions to sell and that will likely keep pressure on Treasury prices as we move through the week.


  • Pressure is likely to remain as Friday brings the May CPI report. Expectations are for another jump in the headline print thanks to a rebound in gas prices. The headline is expected up 0.7% for the month vs. 0.3% in April. The year-over-year is expected to tick down to 8.2% vs. 8.3% the prior month as large monthly increases from last year continue to roll off the calculation, providing another bit of evidence that peak inflation is behind us.


  • Core CPI (ex-food and energy) is expected to increase 0.5% for the month vs. 0.6% in April. The year-over-year print is expected to decrease from 6.2% to 5.9%. That would be the lowest YoY figure since December which is still high but moving in the right direction. If the actual numbers come as expected it may provide the basis for a bit of a relief rally after the pressure of supply and uncertainty over the inflation figures is resolved. Any rally, however, is likely to be limited with the FOMC meeting looming next week.


  • The Treasury market opens the week under some selling pressure as the focus on supply mentioned above is no doubt working as expected. The 10yr Treasury is currently at 2.974%, off 11/32nds in price as a 3-handle yield continues to beckon.


  • The Fed has gone into its pre-meeting radio silence this week so don’t expect any headlines from the members to move markets. The latest to come with significance was last week Fed Governor Lael Brainard mentioning that she doesn’t see a reason at this point to consider a pause at the September meeting, and that a 50bps hike is definitely on the table, differing a bit with Atlanta Fed President Rafael Bostic in that regard. Being a Fed governor, her comments carry a little more weight and the fact she was a reliable dove in cycles past tells you all you need to know about the shift in Fed thinking right now.


  • Fed Fund Futures have the year-end level at 2.84% implying increasing odds that the September meeting could be a 50bps hike, so the Fed rhetoric is working on the market.

Source: Bloomberg


Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 2.71 2.96 3.08 3.26 3.51 3.97
0.50 2.70 2.93 3.02 3.15 3.37 3.86
1.00 2.69 2.90 2.99 3.10 3.28 3.73
2.00 2.89 2.93 3.02 3.16 NA
3.00 2.98 3.10 NA
4.00 3.05 NA
5.00 3.01 NA
10.00 NA

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Published: 06/06/22 Author: Thomas R. Fitzgerald