U.S bonds slump after firm import prices, climbing on IMF report

The U.S. sovereign bonds plunged on Tuesday after strong import prices figure. The yield on the benchmark 10-year Treasury note which moves inversely to its price, moved mildly higher to 1.753 pct, as the yield on the 3-year Treasury bond ticked up to 0.853 pct.

The Labor Department said import prices gained 0.2 pct last month after a downwardly adjusted 0.4 pct decline in February. It was the first time since June that import prices rose and the largest increase since May.

The International Monetary Fund in its recent report lowered the United States 2016 growth forecast to 2.4 pct as compared to 2.6% in its previous forecast, pushing bond prices up. The IMF commented that the fragile world economy needs monetary stimulus and the respective governments must prepare a collective reaction for recession. The Fed hikes should be smooth and gradual and well communicated, further added.

Yesterday, the Dallas Fed President Kaplan retreated that the Fed should remain cautious and patient when deciding to raise rates, noting the need to potentially reverse course of thy opted to move too fast. In terms of concerns abroad, Kaplan said that he see it as clear that Chinese growth is slowing (and is likely to continue slowing), noting that he expects this will weigh on the United States.

“US Treasuries were broadly unchanged after Fed official Kaplan raised concerns about global risks, and favoured a gradual approach to rate rises and markets continue to see no chance of a Fed hike in April, and less than 45 per cent chance of a hike by December”, said St George economists.

This view is not particularly new or shocking from Kaplan who has largely been seen as a dovish leaning voice on the FOMC. Nevertheless, we continue to see a more careful, wait and see approach to continue being employed by the Fed likely to materialize in higher rates come the June FOMC meeting (still delivering only 50bps of additional tightening over the course of 2016).

The market will primarily focus on the up-coming March retail sales, producer price index numbers and the Federal Reserve's Beige Book which are set to be released on Wednesday.

Additionally, markets receive 3-Year Note, 10-Year Note and 30-Year Bond auctions on Tuesday, Wednesday and Thursday, respectively.