Closing Market Recap: U.S. Treasury Yields Higher; Oil & Canadian Dollar Drop Further

Market Updates | Written by CEP News | Aug 05 08 20:33 GMT |
(CEP News) - U.S. Treasury yields received two big boosts on Tuesday, from a better-than-expected ISM non-manufacturing index as well as from the Federal Open Market Committee's balanced statement that accompanied its decision to hold interest rates at 2.00%.

U.S. two-year yields are up 2.4 bps to 2.55%, rebounding after falling 6.4 bps to session lows of 2.507% on the release. Yields had initially reacted favourably to the statement, with five-year yields initially rising 2.5 bps to 3.279% before retracing those gains. They are currently up 5.1 bps to 3.30%. Ten-year yields are up 6.5 bps to 4.03% and 30-year yields are up 5.8 bps to 4.65%.

The FOMC's statement was balanced between a concern for slowing growth and elevated inflation levels. The only dissenting voice in the FOMC decision was Dallas Fed President Richard Fisher, who preferred an increase in the target rate.

"This statement supports our view that the Fed is stuck on the horns of the dilemma posed by its dual mandates (full employment and steady prices), which are currently providing contradictory prescriptions for policy," wrote RBC Capital Markets fixed income strategist T.J. Marta. "Consequently, the statement also supports our curve steepening and bullish eurodollar positions."

The Eurodollar March 09 contract is up 1.5 ticks to 96.84. The yield curve is steeper, with the 10/2-year spread up 4.0 bps to 147.21 bps.

The Canadian 10-year note is yielding 32.95 bps less than the U.S. 10-year note.

Yields on two-year Canadian government bonds are up 1.4 bps to 2.90%, with five-year yields up 1.3 bps to 3.22%, 10-year yields up 3.5 bps to 3.70% and 30-year yields up 3.4 bps to 4.11%. The December 08 BAX contract is up 1.0 tick to 97.06.

In Germany, returns on two-year German bonds are flat at 4.25%, with five-year yields down 1.9 bps to 4.24%, 10-year yields down 2.3 bps to 4.31% and 30-year yields down 1.0 bps to 4.64%.

Yields on UK two-year bonds are down 5.3 bps to 4.75%, with five-year yields down 5.3 bps to 4.72%, 10-year yields down 4.5 bps to 4.77% and 30-year yields down 2.7 bps to 4.53%.

Earlier in the day, the U.S. services industry was reported to have remained in contraction for the second month in a row in July, though the ISM non-manufacturing survey improved more than expected to 49.5, against expectations that it would come in at 48.7. The release gave yields a small boost.

The survey also proved bullish for equities, with the Dow Jones industrial average up 332 points to clsoe the day at 11616. The S&P 500 closed up 36 points to 1285 and the Nasdaq closed up 64 points to 2350.

European stock markets closed in positive territory with the Eurostoxx up 75 points to 2899, the UK FTSE 100 up 134 points to 5455 and the German DAX up 169 points to 6519.

IG Index chief market strategist David Jones suggested in an email to clients that there was a definite correlation between stock-market performance in the U.S. and in the UK.

"It has been a case of solid gains all day, with a stronger opening on Wall Street helping to keep the momentum positive," he wrote. "With the price of oil still weak, and with a retest of the $100 mark not looking out of the question, it could set up something of a tug of war for the index over the next few weeks. A lower oil price is of course a good thing for most businesses - but with so many mining companies making up the FTSE 100, further slides in commodities may well temper gains elsewhere."

Toronto's S&P/TSX composite index closed down 254 points to 13242. The front month gold contract at the Chicago Board of Trade was down $25.30 to $882.60 per ounce and WTI crude oil was down $2.85 to $118.56. The $117.98 session low for oil also represented a three-month low, dating back to early May.

The Canadian dollar is down 0.55 to 103.90 against the yen and down 0.0054 to 0.9596 against the U.S. dollar (1.0421 USD/CAD). The CAD/USD's 0.9968 low was also an 11-month low.

"Net CAD positioning shifted back to the short side, an overall positioning change of $2.4 bln. Speculators seem to be piggybacking USD positive flow from real money managers that are rotating out of Canada's energy heavy TSX, which is down 9.5% since July 1 when compared to the S&P 500," wrote CIBC strategists in a research note.

The U.S. dollar is down 0.01 to 108.26 against the yen and the Dollar Index is up 0.432 to 73.894.

The euro is down 0.0119 to 1.5458 against the U.S. dollar, down 0.0036 to 1.6111 against the Canadian dollar, down 0.0036 to 0.7903 against the pound sterling and is lower by 1.28 to 167.35 against the yen.

The pound sterling is down 0.0062 to 1.9560 against the U.S. dollar and up 0.0041 to 2.0382 against the Canadian dollar.

All data taken at 4:08 p.m. EDT.

By Ryan Szporer, rszporer@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it , with contributions from Patrick McGee, pmcgee@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it , edited by Stephen Huebl, shuebl@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it

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