Weekly Treasury Update
DOLLAR
US Treasuries prices fell on Friday, as profit-taking halted a rebound in the bond market after remarks by Federal Reserve Chairman Ben Bernanke calmed fears that the central bank might raise interest rates sooner than some had thought.
Adding to the bond selling was an interview Philadelphia Federal Reserve President Charles Plosser gave to Bloomberg television, where he said he would like to see the US central bank to halt its $85bn monthly bond purchase programme, known as QE3, this year. Prior to their downturn, Treasuries prices rose partly on political and financial troubles in Portugal.
A warning about weakening Chinese growth also revived safe-haven bids for less risky US government debt, sending benchmark yields to their lowest level in a week and some 20 basis points below a near two-year peak set on Monday.
Moreover, solid demand for this week’s $66bn in coupon-bearing supply helped instill confidence in the bond market in advance of Bernanke’s congressional testimony on the economy next week.
Benchmark 10-year Treasury notes last traded 7/32 lower in price with a yield of 2.599%, up 2.7 basis points from late on Thursday. Earlier, they were up as much as 15/32 with a yield of 2.518%. The 30-year bond last traded 4/32 lower to yield 3.634%, up 0.8 basis point from Thursday’s close.
For the week, the 10-year yield was on track to fall nearly 14 basis points, which would be its steepest weekly decline since June 2012, according to Reuters data.
Friday’s initial price gains in Treasuries were largely driven by remarks from the Fed chief. Bernanke, at a conference on Wednesday sponsored by the National Bureau of Economic Research said a “highly accommodative policy is needed for the foreseeable future.”
Inflation in the US has softened this year, complicating the Fed’s decision whether to reduce its $85bn monthly bond purchase programme later this year. Some Fed policymakers raised concerns that reducing stimulus too soon might exacerbate the risk of deflation, a downward price spiral that crippled Japan’s economy for a decade.
The core rate on personal consumption expenditure, the Fed’s preferred inflation gauge, was 1.1% in May, far below its 2% goal.
US inflation data released on Friday, however, suggested the worrisome price trend might be turning around with the expected pick-up in business activity and consumer spending in the second half.
On Friday, the government said producer prices grew 0.8% in June, faster than the 0.5% forecast by economists polled by Reuters.
EURO
The Euro was the second worst performer last week, as the two sticky issues developing for the single currency — the Portuguese political schism and the new influence of the European Central Bank’s “forward guidance” strategy — matured into full-fledged bearish influences.
Germany’s 10-year (GSPT10YR) government bonds advanced for a second week amid speculation central banks around the world will maintain monetary stimulus, underpinning demand for fixed income securities.
Midweek, following Federal Reserve Chairman Ben Bernanke’s comments regarding the timing of the Fed’s tapering of QE3, the EURUSD had climbed briefly over 1.3200, and it appeared that the market was ready to look past the ECB’s new dovish policy given the more immediate concern over the US Dollar’s recent strength. Yet with such a weak close to the second week of July, and a light economic docket ahead that offers little opportunity for relief, we nevertheless shift our bias to neutral.
Portugal’s President Anibal Cavaco Silva said that early elections were undesirable and urged the ruling coalition parties and the main opposition to reach a “national salvation” pact allowing the country to complete its aid programme.
ECB President Mario Draghi pledged on July 4 to keep interest rates low for an “extended period” in a bid to cap yields that threaten to stifle economic growth.
Such an outcome will likely boost the Euro, as the Fitch Ratings’ downgrade of France’s sovereign rating from ‘AAA’ to ‘AA+’ with a ‘stable’ outlook produced a Euro rally during thin trading conditions on Friday.
Taking a look at the docket, the calendar is once again light this week although Eurozone inflation data on Tuesday may generate volatility. However, given the ECB’s introduction of forward guidance, rates will remain low for the foreseeable future, making any near-term inflation data less important. The only event on the calendar that might otherwise generate interest are the Eurozone and German ZEW surveys for July on Tuesday, but those too are likely to be non-events.
Accordingly, with fundamental pressures pulling in both directions and few catalysts offering sincere guidance, we hold a neutral view.
Range for previous week: $1.2754–$1.3201
Range for this week: $1.2920–$1.3310
STERLING
The British Pound snapped back from a fresh 2013 low of 1.4812 and the GBPUSD may continue to retrace the decline from earlier this year should the Bank of England (BoE) Minutes highlight an improved outlook for the British economy. At the same time, the Consumer Price report may also heighten the appeal of the sterling as the headline reading for UK inflation is expected to expand an annualised 3% in June, and it seems as though the Monetary Policy Committee will slowly moving away from its easing cycle in the second-half of the year as price growth is expected to hold above the 2% target over the policy horizon.
PUBLIC
Moreover, another 8.0K drop in UK jobless claims paired with a 0.2% rise in retail also adds to the case of seeing a meaningful rebound in the British Pound, and we may see the sterling appreciate in the second-half of the year as the BoE sticks to its current policy.
Nevertheless, there’s still speculation that the BoE will adopt a growth target for monetary policy as Governor Mark Carney takes the helm, but the majority of the MPC may continue to favor the inflation-targeting framework in order to ensure central bank credibility.
Although the BoE Minutes may reveal Mr Carney pushing for a GBP 25B expansion in the Asset-Purchase Facility, the committee remains poised to retain its wait-and-see approach as they anticipate a slow but sustainable recovery in Britain, and we may see a growing number of central bank officials adopt a more neutral to hawkish tone for monetary policy as the region returns to growth.
As a result, a slew of positive developments coming out of the UK should further dampen speculation for more quantitative easing, and we may see the BoE stick to the sidelines throughout the remainder of the year as the Funding for Lending Scheme continues to work its way through the real economy.
Range for previous week: $1.4812–$1.5222
Range for this week: $1.4950–$1.5350
YEN
US Federal Reserve Chairman Ben Bernanke ended the Japanese yen’s losing streak against the US Dollar, sending the USDJPY lower for the first week of the past four.
The Japanese yen edged higher against the US Dollar after the Bank of Japan unanimously decided to maintain its monetary policy as it saw the economy “starting to recover moderately” with CPI “likely to turn positive”. It retained its plan for increasing the monetary base by ¥60-70tn annually with a 2014 target of ¥270tn. However, the BoJ also maintained scope for further easing to support stable price growth.
The Bank of Japan made it relatively clear that it could, if conditions warranted, boost its hyper-aggressive Quantitative Easing measures. Yet a relatively upbeat assessment on the domestic economy suggests that Bank of Japan Governor Kuroda sees little reason to add further fuel to the QE-driven yen sell-off.
Looking beyond the US Federal Reserve, Japan’s economic calendar features the Minutes from the Bank of Japan’s most recent meeting and some second-tier data releases. The Bank of Japan failed to elicit much of a reaction as it kept policy unchanged and essentially met market expectations. It’s unlikely the minutes from the same meeting will change that, and the main focus remains the US Federal Reserve and a number of US economic data releases in the days ahead.
Range for previous week: ¥ 98.27–¥ 101.53
Range for this week: ¥ 98–¥ 102.00