US Treasury prices took off Friday following an overnight rally on the threatened Mexican trade tariffs and extended gains into the close with the 2-year holding a significant lead while the long bond was the laggard, steepening the curve.
The market was able to add to the upside on the break in equities as flight-to-quality and month-end buying boosted prices to the highest levels since September 2017. Further inversion of the 3-month to 10-year yield continued to spook traders while the market has priced in two interest rate cuts for the year.
A number of respected shops boosted their expectations for rate cuts out of the Federal Open Market Committee (FOMC) by year-end with JPMorgan looking for two 25 basis point easing-meetings in September and December. Reuters that Barclay’s is looking for a total of 75 bp in cuts for 2019 with a 50 bp easing in September and another 25 bp in December. Barclay’s said their economic and financial conditions outlook has deteriorated and said that earlier cuts by the FOMC “is not out of the question,” should conditions worsen rapidly.
The 30-year yield settled near 2.583% against a late 2.572% low, 2.616% high, a 2.653% close Thursday, and 2.756% Friday, May 24. The 10-year yield went out near 2.137% from a late 2.134% low, 2.183% high, a 2.225% close, and 2.329% May 24. The 5-year yield settled near 1.929% versus a late 1.922% low, 1.986% high, a 2.031% close Thursday, and 2.131% last week. The 2-year yield went out near 1.945% from a late 1.935% low, 2.015% high, a 2.073% close, and 2.175% last Friday.
The curve trade was steeply steeper with the 2-and 10-year yield differential near 19.2 from 15.3 Thursday while the 5-and 30-year yield spread was near 65.4 from 62.2.
CME Group fed fund futures traders boosted the probability of a minimum 25 bp easing by the Dec. 11 FOMC meeting, to 91.1% versus 84.2% Thursday and 66% April 30. The odds of a 50 bp easing was near 35.5% versus 19.7% a month ago.
New York Fed President John Williams talked about research regarding the zero-lower bound of short-term rates and said that “that short-term rates should be cut aggressively when deflation or a severe downturn threatens.” He said policymakers should “not ‘keep your powder dry.'”
April personal income and spending beat at 0.5% and 0.3% against the respective 0.3% and 0.2% expected.
The final May University of Michigan consumer sentiment was short at 100 against 101.5 consensus and a 102.4 preliminary print.
The Chicago Purchasing Managers’ Index rose to 54.2 in May versus 53.6 expected versus 52.6 in April. April personal income and spending both beat, up 0.5% and 0.3% against expectations for respective 0.3% and 0.2% reads.
Monday’s calendar is heavy in manufacturing (as is Europe’s) with the final May Markit Purchasing Managers’ Index due at 9:45 am ET. The May Institute for Supply Management’s manufacturing and April construction spending reports are due at 10 am.
The May vehicle sales data will be released through the session.
The Treasury will auction $36 billion each of 3- and 6-month bills at 11:30 am.
St. Louis Fed President James Bullard speaks on the economy and policy at 1:25 pm with a following Q&A. San Francisco’s Mary Daly is set to speak in Singapore on banking and finance.
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