US Treasuries rise on weak risk sentiment

The U.S. Treasuries pushed higher across the curve on Wednesday alongside equity market weakness in the wake of weaker than expected Chicago PMI and Conference Board consumer confidence releases that showed continued struggles in manufacturing and a less than positive outlook from consumers. Nevertheless, data was only part of the story as greater focus was paid to struggles in crude oil and equities. The yield on the benchmark 10-year Treasury note fell 1 basis point to 1.825 percent by 11:30 GMT.

The US bonds have been closely following developments in oil markets because of their impact on inflation expectations, which are well below the Federal Reserve's target. Today, crude oil prices fell more than 1 percent to below $50 mark after UAE Oil Minister Suhail Mohammed Al Mazrouei said the market will fix itself to a fair price for consumers and producers, adding that the rules of supply and demand are working. The remarks pour cold water on the probability that OPEC will agree to an output freeze to buoy prices. The International benchmark Brent futures fell 1.80 percent to $49.00 and West Texas Intermediate (WTI) dipped 1.24 percent to $48.49 by 09:20 GMT.

On Friday, the Fed Chair Yellen on Friday said that if economic gains continue and if the labour market continues to improve that it is appropriate for the Fed to gradually and cautiously increase our overnight interest rate over time and probably in the coming months, such a move would be appropriate. Although lacking a time factor, this continues to point to increased support for a summer rate hike from the FOMC.

Last week, the preliminary 1Q16 GDP increased 0.8 percent, advanced 0.5 percent, just below market expectations for a 0.9 percent, from unrevised 1.4 percent reading seen in last quarter of 2015. Similarly, personal consumption increased 1.9 percent, as compared to 2.4 percent in the last quarter and core PCE jumped 2.1 percent, following the +1.3 percent increase seen in 4Q15. On the other hand, exports decreased 2.0 percent in the first quarter of 2016, alongside a 0.2 percent decrease from imports.

Markets now look ahead to ISM manufacturing, construction spending, Fed Beige Book and vehicle sales releases on Wednesday as markets slowly make their way towards the May employment report on Friday. Lingering concerns with respect to the magnitude of any rebound in 2Q16 have been strong enough to prevent markets from fully buying into the more hawkish commentary coming from policymakers. However, as the summer Fed meetings approach it could lead to a sharp realization that the bar to keep rates unchanged is not nearly as low as it has been perceived to be in the past.

As markets may need to play catch-up in order to get back onside with Fed intentions to normalize rates we could very well see a renewed streak of selling should the data (and commentary) continue pushing the Fed’s hand along. However, clear risks still remain, stemming from Brexit fears and if data continues to surprise to the downside (particularly with respect to payrolls on Friday), keeping all possibilities open. Until more clarity is seen we expect Treasuries to gyrate in recent ranges. Meanwhile, S&P 500 Futures fell 0.31 points to 2,088.5 by 11:30 GMT.