The Market Today

10-Year Treasury Yield Highest Since July

by Craig Dismuke, Dudley Carter


VS Coronavirus Chartbook (PDF) (Link)

Monitoring the Virus Headlines: Another quiet day of headlines was topped by Russia registering a vaccine, a record number of deaths in Florida, a steep increase of cases in California, and the cancellation of fall football by a couple of major athletic conferences. The Russian vaccine news came overnight ahead of the U.S. session but was followed by a top Russian official announcing plans to produce 10 million doses per month by December. The news that Russia had created an effective and safe vaccine was skeptically received. In the U.S., Florida reported a record 276 deaths from the virus and California’s new infections of 12,500 were the second most in a single day. Dominating social media were announcements from the Big Ten and PAC-12 that they had cancelled all fall sports, including their football seasons


CPI Inflation Firms as Economic Activity Recovers: Consumer inflation was firmer than expected in July with CPI rising 0.6% MoM at both the headline and core levels (exp. +0.3%, +0.2%).  Headline CPI rose from 0.6% YoY to 1.0% while core rose from 1.2% YoY to 1.6%.  Prices were broadly firmer than their recent trends across almost all categories.  There was particular strength in some of the areas of acute economic loss which have seen recent improvement: apparel, autos, hotels, airfares, and delivery services.  Overall, the CPI report appears to reflect the month-over-month volatility associated with stop and re-start of the economy.

Mortgage Rates Drop to New Record Low: Mortgage applications for the week ending August 7 rose 6.8% on a 2.0% increase in purchase apps and a 9.1% increase in refis.  The average 30-year mortgage rate fell 8 bps to a new record low of 3.06%.  Purchase applications continue to point to a solid rebound in housing activity over the next several months.

Fedspeak: Three Fed officials are officially on the calendar to speak today, including Boston Bank President Rosengren (9:10 a.m. CT), Dallas Bank President Kaplan (10:00 a.m.), and San Francisco Bank President Daly (2:00 p.m.).

Deficit to Hit Another Record: Treasury’s Monthly Budget Statement for July is scheduled for 1:00 p.m. CT, and is expected to show another $138 billion deficit despite the delay of 2019 tax payments to July.


As Quickly As They Were Written, Headlines About Equities Threatening Records Were Erased: Equities, Treasurys, gold, and oil all sold off Tuesday in an interesting cross-asset correction on Wall Street. U.S. equities abruptly turned lower Tuesday afternoon, fully erasing solid morning gains that had built up alongside an auto-led rally in Europe after China reported surprisingly-positive car sales for July. After gaining as much as 0.6% to move within 0.2% of February’s record high by midday, the S&P 500 finished down 0.8% and near its low of the day. The major indexes turned lower after Senate Majority Leader McConnell said he had spoken to Treasury Secretary Mnuchin and Chief of Staff Meadows who said talks with Democrats remained at a stalemate. Investors hope President Trump’s executive actions will prod negotiators to reach a compromise stimulus agreement.

Treasury Yields Rise Sharply Despite Equities’ Afternoon Downturn: The swift drop briefly broke the Treasury curve’s rapid daily ascent, but yields recovered to close back near the highs. Treasury yields had risen overnight in response to stronger equities and shot higher around 3:30 a.m. CT after Russia announced it had registered a vaccine for the coronavirus. While skeptically received, the news added to hopes for a more reputable group to find an effective shot soon. Adding to the upward pressure on yields, the Treasury began its auction of a record amount of quarterly debt to fund stimulus efforts with a sale of 3-year notes. Marking the biggest moves since May’s surprisingly strong payroll report was released on June 5, the 2-year yield added 1.8 bps to 0.15%, the 5-year yield added 4.0 bps to 0.28%, and the 10-year yield added 6.6 bps to 0.64%. Gold and silver were quite the spectacle, with the precious metals falling 5.7% and 14.9%, respectively, the biggest declines since 2013 and 2008. While potentially impactful for the market’s longer-term outlook, Presidential candidate Biden’s selection of Senator Kamala Harris to be his running mate had no perceptible impact on the intraday moves.


Rise in Sovereign Yields Continues: Treasury yields were higher again on Wednesday as a sell-off in sovereign debt continued to lift yields around the globe. The move up in yield has occurred alongside a recovery in risk assets and in front of a lunchtime auction of 10-year Treasury notes. The supply pressures have been credited with the increase in yields that has persisted in the face of signals that the stalemate for new U.S. stimulus was no closer to being settled. The only green on the Bloomberg World Bond screen, representing lower yields, was associated with borrowing costs in New Zealand. The country’s central bank expanded its asset purchase program overnight at the same time a major city there was placed under lockdown after the first new virus cases in 102 days were discovered. Ten-year sovereign yields in most countries had risen more than 3 bps around 7 a.m. CT.

U.S. Equity Futures Recover: There was less cohesion with global equities, however, as stocks closed mixed in Asia and a recovery in U.S. futures outpaced more modest gains in Europe. The Stoxx Europe 600 was 0.3% higher with the U.K.’s FTSE 100 leading gains in the region, up 1.3% on the day. The index benefited from a weaker pound, which slipped after data confirmed what economists had expected. The U.K. economy shrank at an unannualized 20.4% in 2Q, its worst quarter on record and a drastically more severe result than other developed economies. Precious metals initially extended yesterday’s sharp declines but have since recovered and are modestly stronger on the day. At 7:30 a.m. CT, S&P 500 futures were up 0.7%, the 2-year Treasury yield was 1.2 bps higher at 0.16% (highest since July 1), and the 10-year yield was up 4.5 bps to 0.69% (highest since June 23).


Daily Fed Developments Relatively Benign: There were no major headlines from comments from a couple of Fed officials with public appearances on Tuesday. President Barkin from the Richmond Reserve Bank said the economy is still in the midst of a historic economic downturn and the recovery may be flattening out. He also noted that low rates could be partially responsible for the increased demand for stocks. In the afternoon, the Fed issued a press release disclosing that it was lowering the rate on tax-exempt borrowings under its Municipal Liquidity Facility by 50 bps and narrowing the spread to those rates for taxable borrowings.

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