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The Bond Column

Closing Bond Summary/Week Ahead
Updated: 2014-12-15, 08:55:28 ET
Analyst: Pat O'Hare

  • Treasuries strung together a good session in overnight action, yet things only got better during U.S. market hours on Friday 
  • Big gains were registered across the yield curve as stock weakness, soft economic data, technical factors, and a continued plunge in crude oil prices fed a steady batch of buying interest throughout the day 
    • 2-yr yield -7 bps to 0.53% 
    • 5-yr yield -7 bps to 1.52% 
    • 7-yr yield -7 bps to 1.87% 
    • 10-yr yield -6 bps to 2.10% 
    • 30-yr bond -4 bps to 2.76% 
  • The benchmark 10-yr note took out the lower end of a trading range it has been locked in (2.16% to 2.40%) since mid-October. Buying efforts accelerated with support giving way and dropped the 10-yr yield to its lowest level since June 2013. 
  • Trading action conveyed a burgeoning belief that a fed funds rate hike in mid-2015 could be deferred
    • Fed funds futures now assigning a 60% probability to the first rate hike occurring in September 2015. 
    • Following the November employment report, there was a 55% probability that July 2015 would be the first time the Fed would raise interest rates. 
  • Today's economic data deviated from headline consensus estimates, yet the results weren't really that much of a surprise 
    • A 3.1% decline in the index for final demand energy paced a 0.2% decline in final demand PPI (Briefing.com consensus -0.1%). Core PPI was unchanged (Briefing.com consensus +0.1%). 
    • Over the last 12 months, PPI is up 1.4%, which is the lowest level since February 2014 
    • The preliminary reading for the University of Michigan Consumer Sentiment report hit 93.8 (Briefing.com consensus 89.5), its highest level since January 2007 
  • China reported weaker than expected 7.2% year-over-year gain in industrial production in November versus 7.7% in October. Retail sales and fixed asset investment were slightly higher than expected. 
  • WTI crude futures declined 3.6% to $57.81/bbl after IEA cut its outlook for 2015 oil demand growth by 230,000 barrels per day on lower expectations for Russia and other oil-exporting countries 
    • Further losses stirred concerns about potential margin calls, debt repayment problems, and social unrest in countries heavily reliant on oil export revenues which, in turn, fostered some safe-haven buying interest in Treasuries 
  • The 10-yr yield dropped 20 basis points for the week while the 2-10-yr spread fell to 157 basis points from 167 basis points at the end of prior week 
  • On Tap: 
    • Japan parliamentary elections over the weekend 
    • Empire Manufacturing, Industrial Production, NAHB Housing Market Index, and Net Long-Term TIC Flows reports on Monday 
    • Housing Starts and Building Permits report on Tuesday 
    • MBA Mortgage index, CPI, Current Account Balance reports on Wednesday 
    • FOMC meeting (December 16-17) 
    • Initial Claims, Philadelphia Fed Index, and Leading Indicators reports on Thursday