Tuesday saw US interest rates test the upside again, this time on the back of an improving durable goods report. The 10-year Treasury yield rose to 4.27% before turning the corner and rebounding below Monday's close of 4.25%. This was buoyed by a strong 5-year auction this time around, after his 2-year sale last time was slightly delayed. However, with PCE's release coming at the end of the month between the Good Friday and Easter long weekends, I'm reluctant to bet on anything major just yet. Overall, however, we believe market interest rates are trending higher due to a lack of confidence in the temporary nature of recent inflation trends.
We were pleasantly surprised by the 5 year old auction. The 5-year bond is rich along the curve and trades about 20 basis points across the simplistic interpolation line between the 2-year bond and the 10-year bond. We thought that the market might not be interested in this paper. However, if there was strong indirect bidding and strong pricing, it would have given the secondary market about 1 basis point of wealth at the time of issuance. There's a hint of long-term bond buying here heading into the long weekend, but only with the knowledge that Friday's U.S. core PCE numbers aren't very good. This is obviously very complex, but it doesn't break through any significant level behind the scenes.
Although euro interest rates turned out to be somewhat stable, Wednesday's data could tip the euro market bearish. This is just the first country indicator ahead of next week's Eurozone preliminary CPI, but the consensus on the Spanish data is for headline CPI to accelerate and core CPI to decelerate only slightly. Pre-Easter conditions may amplify reactions to greater surprises.
