UMBS are actually green for once in the first hour.   Up 9 bps.  S&P futures down 12.25 points

Investor demand for haven assets rose as political upheaval in Europe intensified, driving gains in US Treasuries ahead of inflation data and the Fed’s interest rate decision on Wednesday. The Stoxx 600 fell over 1%, extending losses for the third day, while US equity futures dropped and 10-year Treasury yields decreased by four basis points. The euro weakened, with French markets seeing the most significant moves as 10-year note yields jumped 10 basis points to 3.32%.

Italian debt also experienced increased spreads over German bonds. Speculation around French President Macron’s potential resignation if his party performs poorly in upcoming elections added to market jitters. Globally, investors are preparing for volatility with upcoming US consumer price data and the Fed’s rate decision.

The Fed is expected to keep rates unchanged, but forecasts vary on future rate cuts. Amidst these uncertainties, bond prices are slightly improved in early trading, with the 10-year Treasury yield at 4.447%.

Small Business Optimism improved in May, according to the NFIB Small Business Optimism Index. Optimism hit a high for the year, but we are still at levels associated with the worst months of the pandemic. Inflation remains the biggest concern, and regulatory uncertainty remains another.

The FOMC meeting begins today, and the Wall Street Journal’s Nick Timaros thinks the investor reaction will be driven by the dot plot and whether we have one or two cuts this year. If we get a projection of two rate cuts, investors will start pricing in a Sep cut. If not, then the focus will turn to December.

Shelter inflation remains the biggest driver of the inflation indices, and it looks like we aren’t getting much relief here, with asking rents back up at May of 2022 levels.

10yr Treasury auction = 4.438 vs 4.458 expectations

bid to cover  = 2.67 vs 2.49 avg

This was a very well-received auction, both in terms of the yield award coming in 2bps below the expected level and in terms of the bid-to-cover coming in almost 20bps above the recent average.

If yesterday was a placeholder ahead of bigger ticket events, and if those bigger ticket events arrive on Wednesday, then Tuesday couldn’t possibly be anything other than a placeholder as well.  That said, it was a more interesting placeholder with some friendly volatility delivered by a strong showing at the 10yr Treasury auction.

In some regard, the bond market’s willingness to bid aggressively at this auction (with CPI and the Fed coming up the following morning) might confirm something about the underlying bullish predisposition discussed last week.  But then, as now, the catch is that a bullish predisposition still requires confirmation in the data.  On that note, all eyes on Wednesday’s CPI.

UMBS ended the day up 19 bps.  Somehow.  At 100.35