US GOVTS Outlook: Consolidating the relief; still a tight macro range


BOSTON, July 27 (IFR) -

•	Relief Run Dissipates; Back to the Range; Supportive For Now

•	Data and Related Market Dependent; Bonds Can Go Either Way

•	Trade, Durable Goods, Claims, Chicago NAI, KC Fed, $28 bn 7's

While treasuries have seen their fair share of twists and turns of late, they've
actually gone virtually nowhere over the course of the month. Indeed, the
10-year opened the month trading at 2.30%, more or less where it is currently
changing hands. There are a few standouts happening on the month though.

The long-bond has seriously underperformed on the curve, steepening to the
10-year by 6 bps and near 10 bps to the 5-year. Hard to pinpoint the exact cause
of this but it does appear as if Risk Parity accounts got caught long of
duration at the expense of being under weight equities, and readjusted these
positions accordingly.

As well, the curve has been showing a fair degree of sensitivity to Fed policy
perceptions. The apparent moving forward of the balance sheet unwind - to
September -- while perhaps pushing back the next rate hike - to December or
beyond --  is being viewed as a curve steepening impulse weighing on the

There may well be some underlying angst over the pending debt ceiling debate as
well as nagging concerns that Treasury issuance will be ramping up in the months
to come - due both to the Fed's balance sheet unwind and to higher deficit
projections - with the market more at risk to having to absorb added duration
should Treasury choose to manage its additional debt needs in that direction.

Overall, market direction is seen as mainly in the hands of the global central
banks, who, like the markets, are seen as highly data dependent and somewhat
financial condition dependent, if on a time line that has many moaning "are we
there yet" from the market's backseat.

On the data side of the equation it can now be fairly confidently said that the
inflation metrics have the better potential to move the central bank policy
needle, and hence the markets themselves. With inflation being a slow moving
variable, this focus better speaks to the status quo of low volatility, but
supportive financial markets of stocks bonds and currencies.

Economic growth metrics - employment, GDP etc. - too can be expected to hold a
fair degree of market importance. And unless inflation can be revived, the
growth data likely will be asymmetric in being more bond supportive if it is
weak and vice versa. This mainly owes itself to the lopsided flow of funds,
where the market is still operating in a condition of supply deficit with a
persistently high level of end-user demand.

Both of these situations were seen yesterday where end-users dominated the
5-year auction process, and then the market had an outsized and asymmetric
reaction to what was essentially a more neutral FOMC outcome than not.

Due to these asymmetries - in the flow of funds and reactions to perceived risk
events -- the bond market has an embedded bullish bias that is not expected to
change any time soon. As well, and given this bias, it is easy to convince the
market to believe in such notions as structurally weak inflation and a
semi-permanent low neutral level of interest rates, whether they are accurate or

Though these perceptions are not expected to change anytime soon, and it is not
seen as being today's trade, the expectation is that once the Fed's balance
sheet unwind hits its stride - in twelve to eighteen months - and Treasury - and
mortgage originators -- start to hurl more duration into the market, that bonds
will start to lose their Teflon coat ,and in short order. Again, the sense that
this change is on its way too may well be behind some of the recent steepening
of the yield curve.

For better or worse, today's trade looks like more of a continuation of what has
preceded. That is a contained but mainly supportive and relatively low
volatility range trade, punctuated every now and then by volatility spikes
mainly associated with pending risk happenings such as Fed events, top-tier
economic data, and to a lesser extent supply.

With the FOMC now behind the current focus is shifting to an amalgamation of
high-frequency happenings including the economic data, the behavior of the wider
financial markets - stocks currencies and European sovereigns - and supply.

All are currently tugging a bit on treasuries, with the run for the roses in
equities providing a speed bump of sorts for bonds. European sovereigns have
actually notably outperformed treasuries - roughly 7 bps in the 10 & 30-year
tenors -- over the last week or so, with their strength a source of relative
support. Treasury will be blessing the market with $28 bn 7-years, a perennial
fan favorite, with little reason not to expect a strong reception, if perhaps
with a bit of pre-auction concession effort.

The economic data on the day - detailed below -- does show potential to be
market impressionable, if it is mainly mid-tier in status, suggesting little in
the way of follow-through is likely off of their initial impacts.

The preferred approach is to be market friendly, favoring the buying of dips in
the belly - mainly the 5-year point - and the selling of strength in the curve's
wings of 2s & 30s.  The tactical bias is supportive, favoring the buying of dips
in the belly while looking to sell strength in the curve's wings to a lesser
extent. We look for a 2.32% to 2.27% range in 10s. The strategic bias is long a
50% position in WI 5's at 1.884 at auction versus a 50% short in 30's at 2.928%.
 We will unwind this spread at the market (1.84% and 2.895%) for a 1.1 bps
profit. The curve bias is flat, though favors steepeners on any corrective

Today offers the week's busiest data calendar, with almost all releases hitting
at 08:30. Initial jobless claims filed in the week ended July 22 are expected to
be 241k, an 8k rise over the prior week's 233k, which was among the lowest
readings in 43 years. Continued claims filed in the July 15 week (i.e., the
employment survey reference period) are seen at 1.950 mn, a 27k drop from the
prior week's 1.977 mn, the highest in 11 weeks.

Durable goods orders are forecast to have risen 3.0% m/m in June, following 0.8%
m/m declines in both April and May; it would be the biggest rise in overall
orders since October 2016. Excluding transportation equipment, durable goods
orders are estimated to have risen 0.4% m/m, a slight pickup from May's 0.3% m/m
advance and enough to put these orders at their highest level in 33 months. Core
capital goods orders are seen rising 0.3% m/m, consistent with their growth on a
trailing 6-month average basis.

The Chicago Fed National Activity Index (CFNAI) is coming off a -0.26 reading in
May, tied with January as the lowest since May 2016. Its smoothed 3-month
average declined to 0.04, suggesting modestly expanding activity in the second
quarter. Sometime in the late morning, look for the Atlanta Fed's updated GDPNow
model estimate for Q2 GDP, last suggesting growth of 2.5% q/q AR; the market
consensus forecast for Friday's advance Q2 GDP report is +2.6% q/q AR.

The Kansas City Fed will publish its July survey on manufacturing at 11:00. The
composite index was 11 in June, up from 8 in May, even though the volume of new
orders index fell to 4 last month, the lowest in 10 months. On an ISM-equivalent
basis, the most recent KC Fed survey produced a June index value of 54.8, a gain
of 1.5 points over the prior month. The actual ISM PMI for June was 57.8, a 2.9
improvement over May's index and the highest since January.

The New York Fed will conduct two FedTrade operations on the session. The first
operation targets up to $1.575 bn of 30-year Fannie Mae and Freddie Mac
securities and closes at 09:45. The second operation seeks to purchase up to
$1.1 bn of 30-year Ginnie Mae securities and closes at 14:30.

At 11:00, the Treasury Department will announce details of next Monday's 3- and
6-month bill auctions, believed to be another package of $39 bn and $33 bn for
the two respective maturities. Treasury will auction $20 bn 14-day cash
management bills at 11:30, then auction $28 bn of 7-year notes at 13:00,
completing this week's $103 bn in gross coupon issuance.


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