The U.S. Treasuries held relatively steady for much of the session on Friday, eventually finding selling pressure in the wake of comments from Fed Chair Yellen that indicated support for higher rates in the coming months, should the economy continue to fall in line with her economic outlook. Overall, the short-term 2-Year bonds yield saw considerable upward pressure on the session, breaking back above 0.90 percent (up more than 2-1/2 basis points), alongside a milder increase in the benchmark 10-Year bonds yield, holding right around 1.85 percent (higher more than 1-1/2 basis points).
Earlier data in the form of preliminary 1Q16 GDP and University of Michigan consumer sentiment did little to sway markets, as expected with increased focus on Yellen's afternoon address. The preliminary 1Q16 GDP increased 0.8 percent, advanced 0.5 percent, just below market expectations for a 0.9 percent, from unrevised 1.4 percent reading seen in last quarter of 2015. Similarly, personal consumption increased 1.9 percent, as compared to 2.4 percent in the last quarter and core PCE jumped 2.1 percent, following the +1.3 percent increase seen in 4Q15. On the other hand, exports decreased 2.0 percent in the first quarter of 2016, alongside a 0.2 percent decrease from imports.
The Fed Chair Yellen on Friday said if economic gains continue and if the labour market continues to improve that it is appropriate for the Fed to gradually and cautiously increase our overnight interest rate over time and probably in the coming months, such a move would be appropriate. Although lacking a time factor, this continues to point to increased support for a summer rate hike from the FOMC.
Markets now look ahead to a considerably greater flow of data in the holiday-shortened week ahead (Memorial Day holiday on Monday), highlighted by the May employment report on Friday. From a labour market standpoint, the bar is not particularly high in terms of what is needed in order to keep the Fed on track for a possible summer rate hike. However, should an upside surprise be seen in non-farm payrolls, we anticipate it could go a long way in further locking in market expectations for such a move.
On the contrary, the hedge-fund managers and other large speculators in the futures market have already ramped up bets on losses in two-year notes, holding the biggest short position in the maturity since 2014, according to data as of May 24 from the Commodity Futures Trading Commission. For details see – http://www.econotimes.com/Latest-Commitment-of-Traders-positions-Equities-and-Bonds-as-at-May-24th-2016-214610
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