03:37 PM
Treasuries Plunge on Fed Tapering Talk: Treasuries saw sizable losses as the one-two punch of Fed Chairman Ben Bernanke's testimony in front of the Joint Economic Committee and the minutes from the May 1 FOMC meeting fanned fears the Fed may soon begin to taper its QE bond-buying program. While neither event discussed any imminent tapering, just the threat of the Fed taking away the punchbowl has left many participants skittish as it would mean the potential beginning of the end of the easy money policy. The long bond tumbled more than one and a half points on the session to pace the decline; however, it was the 8.2 bp advance in the 10-yr that led yields higher. Some early afternoon selling ran the benchmark yield through the 2.000% threshold for the first time in two months, before settling at 2.026%. The yield is now 40 bps off its early May low, and is just a couple of bps off its highest close of 2013 (2.056%). Significant steepening took hold along the yield curve as the 2-10-yr spread widened to 177.5 bps. Elsewhere, precious metals ended a volatile session near their lows as gold fell $19 to $1359 and silver sank $0.30 to near $22.15. Thursday's data includes initial and continuing claims (8:30), the FHFA Housing Price Index (9), and new home sales (10). STL's Bullard will be in London, England discussing the U.S. economy and monetary policy (6:05).

02:36 PM

Dollar Gains on Fed Tapering Discussion: The Dollar Index holds near session highs following the release of the FOMC Minutes from the May 1 meeting. The minutes suggested, 'A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth.' The greenback has seen buying in recent weeks on the thought the Fed could taper its QE program, and is currently holding near 82.40, its best level in almost three years. 

• EURUSD is -50 pips at 1.2855, reversing its early strength. The single currency ran up to 1.3000 resistance as Fed Chairman Ben Bernanke's testimony in front of the Joint Economic Committee got underway before sellers emerged to defend key resistance helped by both the 50- and 200-day moving averages. The weakness now has traders shifting their attention back towards the 1.2800 support area as traders ready for tomorrow's Flash Manufacturing and Services PMI data from across the Eurozone. ECB President Mario Draghi will speak tomorrow afternoon in London on 'The Future of Europe in the Global Economy.'
• GBPUSD is -110 pips at 1.5040 as sellers have been in control throughout the session following this morning's weak data and Monetary Policy Committee minutes. Today's plunge has sterling on pace to close at its worst level in more than two months as trade pushes lower for the seventh time in ten sessions. During that time the pair has shed close to 500 pips. The 1.4900 support level will be tracked closely over the coming sessions. Britain's Second Estimate GDP and preliminary business investment will be announced tomorrow.
• USDCHF is +100 pips at .9800 as trade busts out to a fresh nine-month high. Traders seem to be fixated on a test of parity, a level that has not been hit since December 2010.
• USDJPY is +70 pips at 103.20 as trade looks to post its best close in four and half years. The pair hit a high of 103.75 earlier today, but has come off those levels in afternoon trade. Today's weakness comes after Japan's trade balance posted its largest April deficit ever.
• AUDUSD is -120 pips at .9680 as trade pushes to a fresh 11-month low. The .9600 support area will be critical as it dates back to the fall of 2010. Australia's MI inflation expectations and China's HSBC Flash Manufacturing PMI are scheduled for release this evening.
• USDCAD is +115 pips at 1.0385 as trade nears a one-year high. This morning's disappointing Canadian retail sales data sparked today's bid, and the pair seemed to gain momentum as it climbed above the trendline off the November 2011 high. The 1.0400/1.0500 area will be key over the coming weeks with a breakout setting up a longer-term target of 1.10.  

02:07 PM

FOMC Excerpts:

• "Participants also touched on the conditions under which it might be appropriate to change the pace of asset purchases."
• "Most observed that the outlook for the labor market had shown progress since the program was started in September, but many of these participants indicated that continued progress, more confidence in the outlook, or diminished downside risks would be required before slowing the pace of purchases would become appropriate."
• "A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth; however, views differed about what evidence would be necessary and the likelihood of that outcome."
• "One participant preferred to begin decreasing the rate of purchases immediately, while another participant preferred to add more monetary accommodation at the current meeting and mentioned that the Committee had several other tools it could potentially use to do so."
• "Most participants emphasized that it was important for the Committee to be prepared to adjust the pace of its purchases up or down as needed to align the degree of policy accommodation with changes in the outlook for the labor market and inflation as well as the extent of progress toward the Committee's economic objectives."

12:49 PM
Afternoon Update: 2-yr unch @ 99 24/32...3-yr -02/32 @ 99 16/32...5-yr -10/32 @ 98 23/32...7-yr -18/32 @ 98 09/32...10-yr -25/32 @ 97 18/32...30-yr -1 12/32 @ 93 21/32...EURUSD -45 pips @ 1.2860...GBPUSD -105 pips @ 1.5045...USDJPY +115 pips @ 103.65...USDCHF +110 pips @ .9810...AUDUSD -110 pips @ .9690...USDCAD +95 pips @ 1.0365

11:52 AM
Treasuries Reverse Course: Treasuries rallied to session highs as headlines from Fed Chairman Ben Bernanke's testimony in front of the Joint Economic Committee began to cross the wires, but were pushed to session lows as the Chairman suggested the 'Fed could reduce bond purchases in the next few meetings if data supports it.' The complex quickly reversed from session highs to session lows following the Chairman's comments, pushing the long bond down more than one and a half points at its worst levels. The selling ran the 10-yr yield briefly above the 2.000% level for the first time since mid-March, but some buyers have stepped in, dropping yields off their highs. Curve steepening has taken hold as the 2-10-yr spread trades wider at 173 bps. Elsewhere, precious metals are firm, but off their highs, with gold up $2 at $1380 and silver higher by $0.25 near $22.70.

11:10 AM

Greenback Whipped Around During Bernanke Testimony: The Dollar Index has been whipped around as Fed Chairman Ben Bernanke testifies in front of the Joint Economic Committee. The DXY was chopped lower as the testimony and headlines reiterated his previous positions. The continued dovishness sent the DXY below 84 to the 83.50 level. However, the weakness was quickly reversed and the dollar has rallied back to the 84.14 level. The multi-year high of 84.37 will be a key level for the DXY in the coming minutes. Some participants are pointing to the mention by the Fed Chairman that the Fed could taper purchases down the road. This has been in-line with prior comments as he mentioned that the Fed has been generally data dependent from the beginning. There was really nothing new added, but those comments will be used as narrative for the move. In general, it is prior trends (strong dollar, weak gold) that continue to play out.

• The euro rallied to the 1.30 level but was quickly rejected. The reverse in the dollar and the technical resistance has sent the single currency back to the 1.29 level. It is now attempting to hold that area. With the dollar remaining strong on expectations that QE could end 'at some point' the euro weakness will continue to be watched closely. Overnight the preliminary look at the PMI data is due out. A weak round of data will lead to further speculation that the ECB and governments will look toward growth measures to help end the malaise.
• The pound slipped back below the 1.51 level, and is heading back for a test of the 1.50 area. This morning the latest Bank of England minutes were released. The notes continued to show a split central bank committee that sees six members holding steady and three members, including outgoing Governor Mervyn King, in favor of expanding QE. This remains somewhat of a lame duck session as markets await the transition of power in June. But it would appear that the growing expectations for expended QE are driving the pound lower. Cable has now given up approximately 75% of its March to early May rally.
• The yen continues to hit fresh multi-year lows against the dollar. Overnight the Bank of Japan left its current policies in place. This was expected, but there was some surprise that the central bank noted the big run in markets and reiterated that it would not have an impact on its decisions and that it would continue to drive its purchase program aggressively. The yen is now testing the 103.50.
• Commodity currencies are naturally getting hit with the dollar reversal. The Aussie dollar has been smacked down into the 0.9700 area. .9581, which was hit on June 1, will set up as a major level to watch. The Canadian dollar has tumbled into the 1.03 level as it drops to 1.0365. The 1.0400-1.0440 level will set up as a key support level for the currency. Similar to the Aussie, this level was also hit back in June of 2012.

10:22 AM
Treasuries Surge as Bernanke Testimony Begins: Treasuries surged to session highs after Fed Chairman Ben Bernanke's testimony in front of the Joint Economic Committee provided more dovish commentary. The long bond raced to a half point gain while maturities across the rest of the complex have moved decisively into the green. The bid has pushed yields in the belly of the curve down as much as 5 bps with the 10-yr sliding to 1.895%. Aggressive curve flattening has taken hold as the 2-10-yr spread trades tighter at 166.5 bps. Elsewhere, precious metals have surged to session highs with gold up $29 at $1406 and silver higher by $0.65 near $23.10. The latest FOMC minutes will cross the wires later at 14 ET.

10:12 AM

Bernanke Excerpts:

• "Economic growth has continued at a moderate pace so far this year."
• "Conditions in the job market have shown some improvement recently. The unemployment rate, at 7.5 percent in April, has declined more than 1/2 percentage point since last summer."
• "Despite this improvement, the job market remains weak overall: The unemployment rate is still well above its longer-run normal level, rates of long-term unemployment are historically high, and the labor force participation rate has continued to move down."
• "Over the next few years, inflation appears likely to run at or below the 2 percent rate that the Federal Open Market Committee (FOMC) judges to be most consistent with the Federal Reserve's statutory mandate to foster maximum employment and stable prices."
• "Credit conditions in the United States have eased for some types of loans, as bank capital and asset quality have strengthened."
• "Most recently, the strengthening economy has improved the budgetary outlooks of most state and local governments, leading them to reduce their pace of fiscal tightening. At the same time, though, fiscal policy at the federal level has become significantly more restrictive."
• "The Congressional Budget Office (CBO) estimates that the deficit reduction policies in current law will slow the pace of real GDP growth by about 1-1/2 percentage points during 2013, relative to what it would have been otherwise.1 In present circumstances, with short-term interest rates already close to zero, monetary policy does not have the capacity to fully offset an economic headwind of this magnitude."
• "With unemployment well above normal levels and inflation subdued, fostering our congressionally mandated objectives of maximum employment and price stability requires a highly accommodative monetary policy."
• "Since December, the Committee's postmeeting statement has indicated that its current target range for the federal funds rate, 0 to 1/4 percent, will be appropriate "at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.""
• "For some months, the FOMC has been buying longer-term Treasury securities at a pace of $45 billion per month and agency MBS at a pace of $40 billion per month. The Committee has said that it will continue its securities purchases until the outlook for the labor market has improved substantially in a context of price stability. The Committee also has stated that in determining the size, pace, and composition of its asset purchases, it will take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives."
• "The Committee is aware that a long period of low interest rates has costs and risks. For example, even as low interest rates have helped create jobs and supported the prices of homes and other assets, savers who rely on interest income from savings accounts or government bonds are receiving very low returns. Another cost, one that we take very seriously, is the possibility that very low interest rates, if maintained too long, could undermine financial stability. For example, investors or portfolio managers dissatisfied with low returns may "reach for yield" by taking on more credit risk, duration risk, or leverage."
• "A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further."

08:21 AM

European Yields: Yields across Europe hold little changed with slight outperformance in UK Gilts following the release of the latest Bank of England Monetary Policy Committee minutes and disappointing data. Meanwhile, yields across the Eurozone hold little changed following the larger than expected current account surplus (EUR25.9 bln actual v. EUR14.2 bln expected, EUR14.6 bln previous). 

• UK Gilt yields are off 2 bps in the belly of the curve after the latest MPC minutes showed Governor Mervyn King and two constituents were outvoted in their effort to increase the BOE's asset purchase program by GBP25 bln. Today's disappointing data is driving action as retail sales (-1.3% MoM actual v. 0.0% MoM expected), public sector net borrowing (GBP8.0 bln actual v. GBP7.6 bln expected), and CBI Industrial Order Expectations (-20 actual v. -18 expected) all fell short of estimates. A 2 bp decline has the 10-yr Gilt yield down to 1.885%.
• German Bund yields are little changed following today's solid 10-yr auction. The auction raised EUR4.1 bln while drawing 1.41% and a 1.60x bid/cover. The 10-yr Bund yield is unchanged at 1.376%.
• A flat session in Spanish Bonos has the benchmark 10-yr yield holding at 4.195%.
• Light buying of Italian BTPs has yields off roughly 1 bp apiece. The small bid has pushed the 10-yr yield down to 3.885%.

07:29 AM

Dollar Holds Steady: The Dollar Index has spent the entire overnight session in negative territory, and now holds small flat near 83.85. The greenback saw little reaction to a Bloomberg interview with NY Fed President Bill Dudley, in which he suggested it will take three to four months for the Fed to decide whether or not it will taper its QE program. 

• EURUSD is +25 pips at 1.2930 as trade ticks higher for a third session. Action saw a muted response to the larger than expected Eurozone current account surplus (EUR25.9 bln actual v. EUR14.2 bln expected, EUR14.6 bln previous), but did tick to session highs near 1.2950 following the solid German 10-yr auction. The 1.3000 area will provide near-term resistance as both the 50- and 200-day moving averages aid the level.
• GBPUSD is -65 pips at 1.5085 as trade slides to a fresh one and a half month low after the latest Monetary Policy Committee minutes showed the Bank of England remains divided over whether or not more stimulus is needed. Governor Mervyn King and two other constituents were in favor of upping the asset purchase scheme by GBP25 bln, but were outvoted by the remaining members. The headlines crossed as today's data was rather weak with retail sales (-1.3% MoM actual v. 0.0% MoM expected), public sector net borrowing (GBP8.0 bln actual v. GBP7.6 bln expected), and CBI Industrial Order Expectations (-20 actual v. -18 expected) all falling short of estimates. Current levels should provide at least some near-term support while a breakdown sets up a test of the 1.4900 area, which represents the lowest since June 2010.
• USDCHF is +40 pips at .9745 as trade tests nine-month highs following comments from Swiss National Bank Chairman Thomas Jordan. Mr. Jordan, speaking in Frankfurt, suggested the central bank has not ruled out adjusting its EURCHF1.20 floor, and that negative interest rates are still a possibility. Meanwhile, EURCHF is +75 pips at 1.2595 as it trades at its best level in two years.
• USDJPY is +45 pips at 102.95 as trade pressures the best levels since October 2008. Today's bid comes after the Bank of Japan noted the 'economy has started to pick up.' Other comments suggested the central bank has been monitoring JGB yields carefully, and will act accordingly. The 10-yr JGB yield ticked above 90 bps on the news before slipping back to 89 bps. Meanwhile, data out overnight showed Japan's trade deficit narrowed to JPY0.76 trln (JPY0.63 trln expected, JPY0.92 trln previous).
• AUDUSD is -50 pips at .9750 as trade slips back onto the recent lows following the disappointing Westpac Consumer Sentiment (-7.0%). The .9600/.9700 area remains key as action holds near its worst level in a year. USDCNY fell to 6.1313.
• USDCAD is +40 pips at 1.0310 as trade looks to break above the trendline off the November 2011 high. Traders will be monitoring action closely upon the release of this morning's Canadian retail sales data.

06:54 AM
Treasuries Tick Higher in Early Trade: Treasuries hold little changed following an uneventful overnight session that saw action hug the flat line. Headlines crossing early this morning come from a Bloomberg interview of NY Fed President Bill Dudley, in which he suggested the decision to taper the Fed's QE program will take three to four months. Maturities across most of the complex are up just a couple of ticks as they look to put together a second day of advances. The early bid has longer dated yields off close to 2 bps with the 10-yr pushing lower by 2 bps to 1.923% after yesterday's selling had it within an eyelash of 2.000%. Curve flattening persists with the 2-10-yr spread narrowing to 168.5 bps. Elsewhere, precious metals are firm with gold up $9 at $1386 and silver higher by $0.15 near $22.60. Today will see the weekly MBA Mortgage Index (7), existing home sales (10), and the FOMC minutes (14) cross the wires. Fed Chairman Ben Bernanke will discuss the economy in front of the congressional Joint Economic Committee (10).

03:37 PM
Treasuries See Modest Gains: Treasuries ended with modest gains as a late morning bid ran the complex back into positive territory before buyers remained in control for the remainder of the session. The complex was tracking higher in early action, but saw some decent sized selling as equity markets rallied off their opening lows. The 10-yr yield came within a whisker of 2.000%, but was unable to cross the psychologically important level as buyers stepped up to defend the level. As data remained absent, action was dictated by comments from St. Louis Fed President Bullard and New York Fed President Dudley, both of which made their dovish stances know. Mr. Bullard suggested negative rates were possible, although, there is not enough support at this time; while Mr. Dudley reiterated the Fed could adjust the size of its purchases up or down based on changes in the labor market and inflation. Traders took the words from both as a sign the Fed is not yet ready to begin tapering its program. The 10-yr yield ended the day down 2 bps at 1.944%, avoiding its highest close in two months. The buying flattened the yield curve, narrowing the 2-10-yr spread to 170 bps. Elsewhere, precious metals lost ground with gold falling $9 to $1375 and silver shedding $0.20 to near $22.35. Wednesday will see the weekly MBA Mortgage Index (7), existing home sales (10), and the FOMC minutes (14) cross the wires. Fed Chairman Ben Bernanke will discuss the economy in front of the congressional Joint Economic Committee (10).

02:36 PM

Dollar Slips Back Below 84.00: The Dollar Index saw early buying produce a test of the 84.20 area, but trade slipped back below the 84.00 mark following dovish rhetoric from St. Louis Fed President James Bullard. Mr. Bullard suggested the Fed could take rates negative, but there is not enough support at this time. The Index briefly slipped into negative territory, touching 83.65 before buyers emerged. 

• EURUSD is +15 pips at 1.2900 as trade looks for its best close in a week. Late morning strength provided a test of the 1.2950 area, but sellers managed to push the pair off its best levels. Near-term resistance comes into play near 1.3000 and is aided by both the 50- and 200-day moving averages while support rests at 1.2800. EU leaders will gather in Brussels for yet another summit. Eurozone data is limited to the current account balance.
• GBPUSD is -105 pips at 1.5150 as action remains on track for its lowest close in one and a half months. Sellers have been in control since this morning's data showed a letup in pricing pressures, causing many to believe the Bank of England will expand its asset purchase program once the transition of power at the central bank takes place in June. The 1.5100 area will provide short-term support, but the 1.4900 region remains far more important. Britain's retail sales, public sector net borrowing, and CBI Industrial Order Expectations will accompany the Monetary Policy Committee minutes.
• USDCHF is +35 pips at .9700 as trade continues to hold near nine-month highs. Any pullback onto the .9500 level will be monitored closely as key support rests in the vicinity. Swiss National Bank Chairman Thomas Jordan will speak in Frankfurt.
• USDJPY is +30 pips at 102.55 as trade reverses roughly half of yesterday's losses. The pair found support near 102.00 early in the session after Japanese Economy Minister Akira Amari backtracked from yesterday's statement. Mr. Amari suggested, 'I have previously said that the overly strong yen is in the process of being corrected. I will not say it has been corrected, or where it will finish.' The Bank of Japan policy decision will be announced tonight along with the trade balance.
• AUDUSD is +5 pips at .9810 and remains on track to post a second day of gains following its 10-day losing streak. While the hard currency will likely to see further selling pressure as the Reserve Bank of Australia continues to cut rates, a near-term bounce is probable as conditions are heavily oversold. The 1.0200 area is the first level of any real resistance. Australia's Westpac Consumer Sentiment is due out this evening.
• USDCAD is +25 pips at 1.0265 after early buying saw the pair touch 1.0320. The 1.0300 area will be in focus over the coming days, with a close above 1.0320 marking the best in 11 months. Canadian data includes retail sales and core retail sales.