The Week in Review: Treasuries Endure Heavy Selling
The Week Ahead
- Treasuries endured heavy selling this week.
- Most of the week's losses came on Thursday as a de-escalation in Ukraine and better than expected data sparked a sharp sell off.
- EU, Russian, U.S., and Ukrainian officials drafted a framework calling for the "immediate start of a nationwide dialogue within the framework of the constitutional process" that "must be resolved by the Ukrainians themselves concerning an end to the conflict."
- On Friday, initial (304K actual v. 312K expected) and continuing (2739K actual v. 2800K expected) claims both topped forecasts while the Philly Fed (16.6 actual v. 8.6 expected) nearly double estimates.
- Data over the rest of the week was mixed as capacity utilization (79.2% actual v. 78.8% expected), industrial production (0.7% actual v. 0.5% expected), and retail sales (1.1% actual v. 1.0% expected) topped estimates while business inventories (0.4% actual v. 0.6% expected), Empire Manufacturing (1.3 actual v. 7.5 expected), housing starts (910K actual v. 955K expected) and building permits (990K actual v. 1003K expected) missed.
- The latest Fed Beige Book suggested 'economic activity increased in most regions of the country since the previous report' while Fed Chair Janet Yellen indicated the central bank remains committed to an accommodative policy and that there is greater chance inflation runs below the Fed's target.
- This week's selling had the biggest impact on the belly as the 5y surged +17bps to 1.731%. The heavy selling ran the 5y through 1.700% resistance, causing the yield to close at its highest level since April 3. Many traders will be watching the 1.800% area closely as it corresponds with the September and April highs.
- The 10y rallied +11bps to 2.721%. Selling on Friday was responsible for more than +8bps, and ran action back above the 2.680% pivot. Resistance near 2.725% is defended by the 200 dma.
- The wings of the curve outperformed as the 2y added +4bps to 0.399% and the 30y tacked on +5bps to 3.517%.
- The 30y gained +5bps on the week with selling on Friday responsible for a +6bp advance. The yield on the long bond spent the entire week below the key 3.550% level, and pressed to its lowest close since June. What was previously 3.550% support will now serve as resistance, and the inability to retake that level puts 3.150% in the cross hairs.
- A flatter yield curve developed as the 5-30-yr spread narrowed to 178.5bps, a level last seen in the fall of 2009.
- Monday's data is limited to leading indicators (10).
- Tuesday will see the FHFA Housing Price Index (9) and existing home sales (10). Treasury will auction $32 bln 2y notes.
- Wednesday's data includes the weekly MBA Mortgage Index (7) and new home sales (10). Treasury will hold a $35 bln 5y note auction.
- Data picks up a tad on Thursday with initial and continuing claims and durable orders (8:30). Treasury will auction $29 bln 7y notes.
- Data concludes for the week on Friday with Michigan Sentiment - Final (9:55).
Dollar Erases Losses, Trades Flat:
- The Dollar Index has recovered its early losses and now holds little changed near 79.80.
- Aiding the greenback were reports of a de-escalation in Ukraine.
- EURUSD is flat @ 1.3815 after trade was once again rejected by minor resistance in the 1.3850 level. The afternoon weakness has the single currency looking at a third straight flat session as action remains trapped between 1.3800 support and 1.3850 resistance. Markets across the region will be closed Friday and Monday for Good Friday/Easter.
- GBPUSD is flat @ 1.6795 as action presses its worst levels of the session. Early strength lifted sterling to nearly 1.6850, its best since November 2009, but action has struggled to hold onto those gains ahead of the holiday. Minor support rests near 1.6725 while 1.6600/1.6650 provides further help. British markets are closed on Friday and Monday.
- USDHCF is +5 pips @ .8820 as buyers look to remain in control for a fourth day. The current streak has action testing resistance helped by the 50 dma. Swiss banks will be shuttered Friday and Monday.
- USDJPY is +20 pips @ 102.40 as action probes the 50 dma. Today's advance comes despite further commentary from Bank of Japan Governor Kuroda, which reiterated the economy is strengthening and inflation is likely to pick up as wages grow. The pair has not lost ground in six sessions and is on track to close at its best level in one and a half weeks. Japan's tertiary industry activity is due out this evening.
- AUDUSD is -40 pips @ .9330 as trade looks likely to post its lowest close since April 7. Today's selling comes following Australia's disappointing NAB Business Confidence and new motor vehicle sales, and the slowdown in the pace of acceleration of China's foreign direct investment. A more than 700 pip rally off the January lows has run the hard currency to five-month highs, but action has struggled to push through the .9400/.9450 level. Australian banks are closed on Friday and Monday.
- USDCAD is -15 pips @ 1.1000 as trade stalls at resistance in the area. The pair has struggled since this morning's hotter than anticipated headline CPI (0.6% MoM actual v. 0.4% MoM expected).
Afternoon Update: 2y -01/32 @ 99 30/32...3y -04/32 @ 99 28/32...5y -12/32 @ 99 15/32...7y -19/32 @ 99 21/32...10y -24/32 @ 100 08/32...30y -1 03/32 @ 102 06/32...EURUSD unch @ 1.3815...GBPUSD -5 pips @ 1.6790...USDJPY +10 pips @ 102.30...USDCHF +5 pips @ .8820...AUDUSD -45 pips @ .9325...USDCAD -10 pips @ 1.1005
Treasuries Press the Lows
- Treasuries linger near the lows as steady selling persists into the lunch hour.
- Better than expected claims data and the Philly Fed beat have yields higher by as much as +5bps in the belly.
- The 5y is +5bps @ 1.705% as action probes resistance guarding the April highs.
- A +4.2bp advance has the 10y testing the 2.680% pivot. The benchmark yield has closed below the key level in each of the past five sessions.
- At the long end, the 30y continues to its outperformance, +2.3bps @ 3.477%. A retest of what was previously support in the 3.550% area cannot be ruled out, but the yield is likely to continue moving lower in the weeks ahead.
- Flattening persists along the curve as the 5-30-yr spread tightens to 177bps.
- The U.S. Treasury market will close at 2pm ET in observance of Good Friday.
Sterling at Highest Level Since 2009:
The Dollar Index
has traded in a tight range for the majority of the week. The DXY has stabilized from its recent decline to cut a path in the 79.50-79.80 area. Economic data this morning was positive as initial claims were lower than expected and the Philadelphia Fed posted a strong beat against expectations. However, volume remains light as markets prepare for a three-day holiday weekend.
- The euro continues to hold the 1.3800 level despite EU and ECB officials attempts at verbal intervention. The euro ignored a weak German PPI number to stretch to 1.3863, but it has since given up some of those gains. Europe is also seeing lighter volume as it prepares for the holiday weekend.
- Sterling has hit a fresh multi-year high as it reached 1.6842, its best level since November of 2009. Sterling has been bid all week following a better than expected jobs report.
- The yen attempted to break above 102.00 overnight, but ran into resistance at 101.86 and has since fallen back to the 102.20 area. The move comes as markets see a return to risk as earnings reports in the U.S. and E.U. are coming in better than expected. The trading volume does remain light, which has participants cautious about the recent market trends.
Treasuries Retest Session Lows as Philly Fed Beats:
- Treasuries are sliding back onto session lows following the strong Philly Fed (16.6 actual v. 8.6 expected) print.
- Selling continues to weight heaviest on the belly as the 5y trades +4.5bps @ 1.700%. Traders will continue to watch this area closely as resistance in the 1.660%/1.700% area guards the early-April highs.
- A +2.5bp advance has the 10y above 2.660%. The benchmark yield is ticking higher for the third time in four days, and is nearing a test of the 2.680% pivot.
- Outperformance at the long end has the 30y flat @ 3.545%.
- Curve flattening persists as the 5-30-yr spread trades tighter @ 175.5bps.
- Precious metals are in the red with gold -$5 @ $1299 and silver -$0.05 @ $19.58.
- Treasuries press to their worst levels of the session following the better than expected initial (304K actual v. 312K expected) and continuing (2739K actual v. 2800K expected) claims data.
- Selling has yields up +2bps across most of the curve with the 10y testing the 2.660% level.
- Slight outperformance at the long end has the 30y +1bp @ 3.464%.
- A flatter curve has developed with the 5-30-yr spread tighter @ 179bps.
- A mixed session for precious metals has gold -$1 @ $1302 and silver +$0.02 @ $19.66.
- Philly Fed is due out at 10am ET.
Dollar Sees Early Selling:
- The Dollar Index trades modestly lower as action presses the 79.65 level.
- Traders will continue to monitor key support in the 79.00/79.40 area, which has held up since early 2012.
- EURUSD is +35 pips @ 1.3850 as a bid has developed despite the cooler than anticipated German PPI (-0.3% MoM actual v. 0.1% MoM expected). Minor resistance in the area has acted as a headwind the past couple of sessions as it guards the recent highs near 1.390/1.3950.
- GBPUSD is +15 pips @ 1.6810 as trade holds at its best levels since November 2009. The early bid has sterling on track for a third day of gains as buyers remain in control amid expectations the Bank of England will be the first major Western central bank to hike rates and emerge from the financial crisis.
- USDCHF is -35 pips @ .8785 as selling takes hold following three days of gains. Minor support near .8760 will be watched closely as a breakdown puts the March lows near .8725 in jeopardy.
- USDJPY is -10 pips @ 102.10 as trade slips off the 50 dma. Overnight, Bank of Japan Governor Kuroda spoke in Tokyo, reiterated the economy is improving and that prices will rise as wage growth picks up. The 101.50 area provides key support.
- AUDUSD is -25 pips @ .9345 as sellers have taken control following the disappointing NAB Business Confidence (6 actual v. 8 previous) and new motor vehicle sales (-0.3% MoM). The overnight weakness has trade probing minor support in the .9350 area with a breakdown likely putting pressure on .9250/.9275. USDCNY was little changed @ 6.2194.
- USDCAD is flat @ 1.1015. The pair has gained in four of the past five sessions, which has action testing resistance in the area. Canada's CPI will be released later this morning.
Treasuries Hold Little Changed:
- Treasuries hold little changed ahead of the cash open.
- Overnight action was limited to a 3bp range across the curve.
- Outperformance in the belly has the 5y -1.9bps @ 1.636%. Early action saw a test of 1.660%/1.700% resistance, but was unable to break through the level.
- The 10y trades -0.8bps @ 2.629%. Focus remains on the 2.600% level, which has held up since the beginning of February.
- At the long end, the 30y hovers -0.5bps @ 3.449%. Yesterday's close marked the lowest since June.
- A slightly steeper curve has developed as the 5-30-yr spread trades 181.5bps.
- Precious metals trade in the red with gold -$5 @ $1298 and silver -$0.04 @ $19.59.
- Data: Initial and continuing claims (8:30), and Philly Fed (10).
- The U.S. Treasury market will close for the week at 2pm ET in observance of Good Friday.
Curve Flattest Since October 2009:
- Treasuries finished mixed amid a choppy trade.
- The complex held small losses into the U.S. cash open before some light buying emerged in response to the disappointing housing starts (946K actual v. 955K expected) and building permits (990K actual v. 1003K expected) data.
- Maturities would slip onto their worst levels of the session following the strong industrial production (0.7% actual v. 0.5% expected) and capacity utilization (79.2% actual v. 78.8% expected) numbers, but failed to see follow through selling.
- A choppy trade persisted before Fed Chair Janet Yellen suggested the central bank remains committed to an accommodative policy and that there is greater chance inflation runs below the Fed's target.
- The latest Fed Beige Book indicated "economic activity increased in most regions of the country since the previous report."
- Outperformance at the long end saw the 30y shed -0.6bps to 3.454%. The yield on the long bond closed on session lows, and at a level last seen in June.
- The 10y edged up +0.9bps to 2.637%. Traders will continue to monitor the 2.600% level over the coming sessions as that level has held up since early February.
- The 5y lagged, finishing +3.7bps @ 1.655%. Selling produced a fourth straight rise in yield, and has action moving towards a test of resistance in the 1.660%/1.700% area.
- Today's mixed trade flattened the yield curve with 5-30-yr spread tightening to 180bps, which was last seen in October 2009.
- Precious metals were firm with gold +$2 @ $1302 and silver +0.13 @ $19.62.
- Data: Initial and continuing claims (8:30), and Philly Fed (10).
Dollar Hovers Little Changed:
- The Dollar Index hovers flat near 79.80 amid a mostly uneventful trade.
- Overnight weakness dropped the Index to a session low near 79.65, but trade has erased those losses on the back of the better than expected industrial production and capacity utilization data.
- The latest Fed Beige Book crossed the wires at 2pm ET, and suggested "economic activity increased in most regions of the country since the previous report."
- EURUSD is +10 pips @ 1.3820 as light buying has taken hold following three days of losses. The single currency is higher despite the mostly disappointing data from the region as trade managed to find support at the 1.3800 level. Many traders continue to watch the 1.3850 area as a breakout puts the recent highs in play. Eurozone data is limited to German PPI.
- GBPUSD is +70 pips @ 1.6795 as action contends with its best close since November 2009. Sterling has benefitted from the drop in the UK's unemployment rate to 6.9% (7.2% expected, 7.2% previous) as traders continue to price in expectations the Bank of England will be the first major Western central bank to emerge from the crisis. The Bank of England's previous forward guidance had fingered an unemployment rate of 7.0% or below before a rate hike was even considered, but a recent alteration has the central bank now looking at a range of data.
- USDCHF is +10 pips @ .8810 as trade has reversed its early losses. Today's bid has action ticking higher for a third straight session, putting .8825 resistance and the 50 dma (.8850) in the cross hairs.
- USDJPY is +40 pips @ 102.25 as trade probes the 50 dma. The pair has found a bid on the back of yesterday's Nikkei report that suggested Japan was going to downgrade its economic assessment. That report seemed to fly in the face of comments from BOJ Governor Kuroda, who overnight suggested wage growth was beginning to pick up. Mr. Kuroda will speak in Tokyo this evening.
- AUDUSD is +25 pips @ .9380 as after weakness found support near .9350. The hard currency has been helped by the better than expected Chinese GDP data with action holding near its best level in five months. Australia's NAB Business Confidence and new motor vehicle sales are due out tonight.
- USDCAD is +35 pips @ 1.1015 after the Bank of Canada held its key rate steady at 1.00%, as expected. The inaction marks the 29th consecutive meeting the central bank has kept its overnight rate at 1.00%, meaning it hasn't taken action since September 2010. Canada's CPI is scheduled for tomorrow.