After selling off over the past four sessions, Treasuries rallied Wednesday on a string of worse than expected economic data releases. Early in the day, initial and continuing unemployment claims for the most recent week rose above expectations. This suggests that the labor market remains soft. Empire State Survey showed deterioration in manufacturing conditions in New York, with the general business conditions index falling to -3.2 from 0.6. The NAHB Housing Index fell to 19 in May from 20 in April, just above the record low of 18 reached in December.
Meanwhile, in other newsworthy events, given the ongoing debate as to whether or not we are in recession, it is worth noting the comments of NBER’s Martin Feldstein. Last night, he said that the U.S. economy faces various risks and amid mixed economic performance, it is tough to get a clear economic read. Yet, "there is a significant risk that this could turn into a deep recession." He noted that "most measures of the economy peaked in December 2007." Feldstein was asked which way the Fed would move rates next. He replied that it is unlikely rates would move either higher or lower in the near future.
On the day, the front and intermediate end of the curve rallied sharply with yields on the two- and five-year Treasury benchmarks declining by nine and 11 basis points, respectively. On the longer end, yields in the 10- and 30-year sector declined by nine and six basis points, respectively. The yield curve steepened, but it was the five-year sector that clearly led the move higher. 2s-5s actually flattened on the day despite the 3 bp steepening of 2s to 30s. The curve, as measured by the two- to 10-year spread, remained unchanged, ending the day at 140 basis points. In the credit markets, fixed swap spreads tightened by five to six basis points along the curve, leading to narrower spreads across all spread products. U.S. agency bullets, MBS and investment grade corporate securities outperformed on the day.
Today’s economic calendar commences with the release of April Housing Starts at 8:30 a.m. The preliminary results of the April University of Michigan Consumer Sentiment Survey will be released at 10:00 a.m. At some time during the morning, annual revisions to Factory Orders will be released.
