- 10-year T-note yield falls sharply to 1-month low
- U.S. consumer sentiment expected to strengthen further
- U.S. housing starts expected to recover sharplyÂ
10-year T-note yield falls sharply to 1-month low — T-note prices on Thursday rallied sharply despite the release of very strong U.S. economic data. June 10-year T-notes rallied by +23.5 ticks, and the 10-year T-note yield fell by -9.6 bp to 1.54%.
Strong economic data released Thursday included the sharp -203,000 decline in U.S. weekly initial unemployment claims to a 13-month low of 576,000. Also, March retail sales soared by an extraordinary +9.8% m/m, stronger than expectations of +5.8% m/m and the largest increase in 10 months. The April Philadelphia Fed business outlook index unexpectedly rose +5.7 to a 48-year high of 50.2. The April Empire manufacturing index unexpectedly rose +8.9 to a 3-1/2 year high of 26.3.
On the weaker-than-expected side, March U.S. manufacturing production rose +2.7% m/m, weaker than expectations of +3.6% m/m.
A variety of reasons were offered for Thursday’s sharp T-note rally. Bullish factors for T-note prices included (1) reports of strong Japanese and Chinese demand for U.S. Treasury securities, (2) the Biden Administration’s announcement of new sanctions on Russia, (3) rising Covid infection rates, and (4) a -1.9 bp drop in the 10-year breakeven inflation expectations rate to 2.33% (down by -5 bp from the late-March 7-3/4 year high of 2.38%).
There was also a dovish comment from Atlanta Fed President Bostic, who said “we have seen in the last 10 years that the economy can run a lot hotter than we ever expected without seeing inflation,” so the Fed “is going to wait to see that inflation happens before it starts to slow down the economy.”
T-notes are seeing continued support from the ongoing global pandemic, which undercuts economic growth and is dovish for central bank policies. The 7-day average of new Covid infections in the U.S. rose to 71,343 on Tuesday, the most in 7 weeks. Also, Germany reported 31,117 new Covid Infections on Thursday, a 3-month high, and the occupancy rate in intensive-care units rose to 88% on Wednesday, the highest in more than a year. In addition, India reported a record of 200,739 new Covid infections on Thursday.
T-note prices saw support Thursday on the report from Japan’s Ministry of Finance that Japanese bond funds bought 1.7 trillion yen ($15.6 billion) in overseas fixed-income assets in the first week of April, the most in five months. Japanese bond funds are the largest holders of U.S. government bonds.
Later in the day, the U.S. Treasury reported that China’s holdings of U.S. Treasury securities in February rose by $9 billion to a 1-3/4 year high of $1.1 trillion. That was the fourth straight monthly rise. The rise likely had to do more with trade flows than any explicit effort by China to boost its Treasury holdings. Nevertheless, the fact remained that China bought more Treasury securities.
The news of Japanese and Chinese buying reminded the markets that there is still strong demand from overseas for U.S. Treasury securities, which are providing stellar yields compared with the near-zero or negative yields available in Japan and Europe. There is currently almost $14 trillion of negative-yielding debt overseas, which creates a powerful incentive for foreign investors to buy positive-yielding U.S. Treasury and corporate fixed-income securities.
The combination of strong U.S. economic data and the sharp rally in T-note prices propelled stocks higher again on Thursday. The S&P 500 index rallied to a new record high and closed the day up +1.11%. The Nasdaq 100 index also posted a new record high and closed with an even stronger gain of +1.61%.
U.S. consumer sentiment expected to strengthen further — The consensus is for today’s preliminary-April University of Michigan U.S. consumer sentiment index to show a +4.1 point increase to 89.0, adding to March’s increase of +8.1 to a 1-year high of 84.9. Consumers were out in force spending money in March as seen by yesterday’s news of a +9.8% m/m surge in March retail sales.
U.S. consumers are in a much better mood as vaccinations lead to reduced restrictions and an eventual end to the pandemic. Consumers are also sitting on a huge pile of about $1.7 trillion of cash that was saved up during the pandemic when consumers couldn’t travel or eat out at restaurants.
Many consumers are also in a good mood after receiving their stimulus checks in March and April of another $1,400. That added to the $600 stimulus checks that many consumers received in January and early February.
Consumer confidence is also receiving a boost from the improving labor picture. Payroll jobs rose by +916,000 in March and rose by a monthly average of 692,000 in Jan-March. The increased hiring means that more people are gainfully employed with a steady income and less uncertainty about the future.
U.S. housing starts expected to recover sharply — The consensus is for today’s March housing starts report to show a +13.4% m/m increase to 1.611 million, more than reversing Feb’s -10.3% decline to 1.421 million. Housing starts are expected to recover on better weather and continued strong underlying demand for new homes. Yesterday’s April NAHB housing market index rose by +1 point to 83, which was only 7 points below November’s record high of 90 and indicated very strong homebuilder confidence.
