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A glacial rally for bonds

By Dwight Johnston on October 12, 2017 at 9:24 am

Dow futures are down 22 points in pre-opening trading as earnings season begins. JP Morgan and Citigroup released earnings that beat both earnings and revenue estimates, but traders are not reacting positively. Bond prices are slightly higher.

Economic news

In economic news, Weekly Jobless Claims fell from 258k to 243k, as the impact from the hurricanes continues to fade. The Producer Price Index rose by .4%, and the core rate rose .4%. The core rate is .2% higher than expected. Bond traders had little reaction to the news. While higher inflation news is not good for bonds, PPI is of little concern with CPI due out tomorrow.

Bond market snapshot

After four consecutive weeks of losses for bonds, the bond market has been up all three days this week. Based on the opening today, bonds will close higher today as well. Sounds great for bond bulls, but the move has been grudging to say the least. The yield on the 10-year note has moved lower by only 1 basis point each day. The 10-year closed at 2.37% Friday. But bullish traders are encouraged that the market did manage to rebound from the 2.40% early Friday, and each tiny move further away will encourage more speculative buying. ‘

The Treasury will auction 30-year bonds today. Demand for yesterday’s 10-year note was not great, but dealers expect demand to today will ample. Traders like to play games with these refunding bonds. It’s a chance for them to buy large positions and then fabricate a rally to book quick profits. That ploy did not work in September, but the track record of post-auction bond rallies is very good.  

Tomorrow could be a key day for bonds and determine if the auction play will work this time. CPI will be released tomorrow. Economists are expecting a headline gain of a strong .6%, but that will be mostly related to the price of gasoline. The core rate (ex-food & energy), is expected to be .2%. If it is less than expected, you can expect a stronger move in bonds. If it is higher than expected, the bond market could give back all of the gains this week. This could be a big deal tomorrow. Of course, it could also be no deal at all if the number is as expected. Retail Sales will also be released, but the data will be influenced by the hurricanes and shrugged off. 

The buzz around the next Fed Chair continues to build. A lot of analysts are expecting an announcement tomorrow, but that is certainly not a done deal. In fact, Trump might still be interviewing candidates. There has been no word that process is complete.

Opening market snapshot

  • The 2-year is 1.51%
  • The 5-year is 1.95%
  • The 10-year is up 3/32 at 2.34%
  • The 30-year bond is up 8/32s at 2.87%
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