The Range Trade Continues for Treasuries

  • Treasuries are in the green this morning, but the trading remains rangebound as the lack of market-moving catalysts keep traders quiet as they await the long Easter weekend. The market does have to contend with more supply today as $43 billion in 7yr notes are auctioned, but yesterday’s strong 5yr results bode well for the 7yr auction.  Plus, once today’s new notes are put away the market has a two-week reprieve before dealing with more coupon supply. Presently, the 10yr Treasury is yielding 4.22%, up 2/32nds in price while the 2yr note is yielding 4.58%, unchanged on the day.


  • With markets closed for Good Friday, and an early close tomorrow, the week/month/quarter is quickly coming to an end, and with no economic news today the range trade that we’ve been in for two months looks to continue for the time being.


  • February PCE remains the last important report this week but coming on Friday delays any market reaction until next Monday. While a surprise read is always possible with CPI and PPI already in hand the expectation of a 0.3% core print seems more substantive than an educated guess. We’ve mentioned before but it warrants repeating that for the next three months we’ll see 0.3% prints rolling off from last year then the monthly rates drop into the 0.1% to 0.2% range. That means it will be tough to move the needle on the YoY pace if we keep printing 0.3% monthly rates. It’s something to think about as the calendar moves inexorably towards June where futures markets continue to price high odds (63%) for the first rate cut.


  • We are also interested in the spending numbers in Friday’s report. Recall, February’s retail sales were disappointing. but that report is more goods-based. The personal spending figures are more comprehensive, thus taking in a larger swath of the service-side of the economy, and that’s were the spending gains have been occurring of late. Expectations are for a nice rebound in spending (0.5% vs. 0.2% January) which would imply the service-side continues to lead, and that is where the sticky inflation has been coming from.


  • While it’s too soon to quantify the economic impact of the bridge collapse in Baltimore it’s safe to say at a minimum it adds sand to the gears in the logistics and shipping areas. While shippers will be quick to adjust to other ports while Baltimore’s remains blocked, it seems logical to see higher shipping rates, longer delivery times, and that doesn’t include road-based shipping that will be delayed and redirected due to the bridge closure. So, for a Fed looking to see better inflation numbers for the next few months, this doesn’t help.


  • Don’t look now but Japan has seen its currency drop to a 34-year low against the dollar (see graph below) and comments from the Bank of Japan imply they are close to intervening to stem yen weakness. What that could mean for our Treasury market is possible selling of short Treasuries by Japan to raise dollars to be used to defend the yen. That could put some upward pressure on short-term Treasury yields in the days and weeks ahead. In any event, add monitoring the spot yen rate to the list of things to be watching.


  • Finally, there is some Fed speak today but it occurs at 6pm ET when Fed Governor Waller speaks on his economic outlook. Waller is one of the more influential voices on the FOMC so any new guidance on his inflation and labor market outlook will be closely viewed as will his view on rate-cutting expectations for this year. Any headlines, however, will have to wait until tomorrow to be acted upon so it could be an interesting Thursday morning with an early close.

Japanese Yen Hits 34-Year Low Against the Dollar – BoJ May Intervene to Stem the Weakness

Source: Bloomberg

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Published: 03/27/24 Author: Thomas R. Fitzgerald