Morning Interest Rate and Treasuries Report

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July 27th, 2012

US Treasury markets established a lower low during the initial morning hours but have since climbed back toward unchanged levels. It appears that excitement over yesterday’s comment from ECB President Mario Draghi has waned. This shines through in the price action in September Bonds and Notes, which never quite experienced the reaction seen in equities or the Euro currency. Further doubts over the “whatever it takes” comment came from Germany’s Bundesbank this morning, which maintained their doubts over the effectiveness of further bond buying. In fact, German Bunds traded to their best levels of the session in response and US Treasury markets recouped a portion of their early losses. The trade also seemed to take the view that these measures are a short term solution at best and they could leave the market even more susceptible to disappointment. Meanwhile, there remains considerable uncertainty in the market and that continues to support Bonds and Notes. The latest came from IMF Chief Christine Lagarde earlier this morning warning over the fiscal cliff ahead in the US, as well as rising debt levels. These comments also seemed to offer the Treasury market a measure of support this morning. This week’s Treasury auctions showed rather strong demand in the face of record low interest rates. Yesterday’s 7-Year Note auction showed a slight pullback in demand relative to recent averages, but it did register a record low yield of 0.954%. The near term focus for the bond market this morning is second quarter GDP, which is expected to show a slowdown from the pace in Q1 to around 1.5%. While many economists view a print of 1.5% or lower as a concern, some expectations call for only fractional growth in the quarter. A surprisingly negative reading this morning has the potential to push September 30-Year Bonds and 10-Year Notes into new contract high territory. The market will also get a read on July US economic sentiment, which is expected to match its preliminary readings. The result of this morning’s flow of US economic data is likely to have a greater barring on next week’s Fed and ECB policy meetings. While there has been a great deal of chatter that the Fed will embark on another round of monetary stimulus, the US Bond market does not appear to be expecting much. Perhaps a shift in the language calling for interest rates to stay low into 2015.
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