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Bonds Could Fall More Quickly Than Expected

David Becker
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www.iforex.com

The surprising 4.0% surge in U.S. Q1 GDP and the continued strength in the ISM manufacturing index, alongside a decent gain in the labor market increased anxiety over the Fed’s tightening timeframe. While the FOMC’s slight upgrade to its growth and inflation outlooks alongside the hawkish dissent, suggested the Fed might be moving more quickly toward an eventual rate hike, the caveat that there’s still significant slack in the labor market confirmed policymakers are still at a walking pace.

Market participants needed to absorb a plethora of data last week that pointed to stronger than expected growth. The data showed a stronger than expected Q2 GDP (4.0%), ADP (230k), consumer confidence (90.9), ECI (0.7%), and ISM (57.1) offset somewhat by a more tempered than projected payroll gain (209k), a surprise uptick in the unemployment rate (6.2).

Treasuries round tripped last week with yields closing the five day stretch unchanged to a little lower. The 2-year note trading over 0.5% to test 0.55% after Wednesday’s Fed decision, but recovered to close at 0.47% on Friday. The 10-year note opened at 2.48, rose to test 2.56% on Thursday before falling to 2.49% to finish the week.

Supply remains light this week and that may temper the upward drift in Treasury yields over the past two weeks.

The August refunding is just around the corner, which should limit the downside. Debt managers are expected to announce the details of the quarterly auctions, which are forecast to show a $66 billion 3-pronged package, including $26 billion in 3-year notes, $24 billion in 10s and $16 billion in 30s. Risk is that the Treasury does not reduce the size of the 3-year.

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