Stock Market

Bond Prices Higher with Bulk of Auctions Out of The Way — 10-Year 2.267%

US Treasury prices continued to grind higher Tuesday but were off the session highs, with the 10-year leading the charge and the 2-year remaining the trailer.

The market successfully digested a pair of 2- and 5-year Treasury auctions with an impressive 2-year sale and a solid new 5-year note. Demand was solid even with yields running near the lowest, and prices at the richest, since January 2018 on the 2s and October 2017 on the 5s.

The 30-year yield was near 2.70% from a 2.697% low, 2.733% early high and 2.756% close Friday. The 10-year yield was near 2.267% versus a 2.265% low, early 2.30% high and 2.329% close. The 5-year yield was near 2.074% against a 2.069% low, 2.105% opening high and 2.131% Friday. The 2-year yield was near 2.127% from a new 2.122% low, opening 2.16% high and 2.175% close.

The market continues to benefit from a number of overall uncertainties regarding trade, Brexit and generally slowing global manufacturing data. The weight of Treasury supply is expected to be tempered by the US premiums over other sovereigns.

The market resumed betting on the Federal Reserve’s pulling out a rate cut before a hike. Chances of a 50-basis-point easing by year-end increased to 30% from 18% a week back.

Analysts with Morgan Stanley have looked at their policy-adjusted yield curve measures and determined the predictive power of yield curve inversion for recession remains reliable. They wrote not only is “recession risk…higher than normal. It also suggests volatility is about to rise…a lot.”

Morgan Stanley said when the 3-month to 10-year yield spread inverted in March “there was a lot of noise about what it meant for markets. However, it didn’t stay inverted very long and the noise dissipated.”

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Morgan Stanley “adjusted the traditional yield curve for [quantitative-easing and -tightening]” and noted the adjusted “curve inverted last December rather than in March, and it’s remained well below 0% ever since.” Along with other inputs, the firm said the situation “suggests the ‘shot clock’ started 6 months ago, [and put] us ‘in the zone’ for a recession watch.”

It said it believes “the bond market has it right to suggest the next move for the Fed will be a cut.” The curve inverted near the same time there was a US-China late November “trade truce” and has remained negative “despite all the positive rhetoric earlier this year around a trade deal. We think this means the US economic slowdown and rising recession risk is happening regardless of the trade outcome.”

Meanwhile, analyst with Action Economics summed up the day’s data noting the May Conference Board’s consumer confidence pop to a 6-month high of 134.1 from 129.2, left the headline just below the 3-month string of 18-year highs that ended with a 137.9 reading in October, and at its 5th highest level since 2000. The jobs strength diffusion index surged to a new 18-year high of 36.3, while the 1-year ahead inflation expectations measure fell to a 4-month low of 4.4% from 4.6% (was 4.5%).

The Dallas Fed index fell to -5.3 in May from 2.0 in April, while the ISM-adjusted index fell to a 2-year low of 51.8 from 52.4. The Dallas Fed components revealed declines for orders and shipments, but a bounce for the employment index.

The consumer confidence surveys have largely defied trade war concerns and have risen to remarkable highs through May, though the producer sentiment surveys appear more at risk to a trade war headwind, which might have contributed to the Dallas Fed drop.

Home prices saw declines in the March year-over-year readings to 2.7% from 3.0% for S&P Case-Shiller, and to 5.0% from 5.1% for the Federal Housing Finance Agency’s index.

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