Treasury Futures Mixed on Tax-Cut Bill

INTEREST RATE MARKET FUTURES

Futures are mixed across the curve, with short- and medium-term bonds picking up strength while the 30-year bond is lower.

The 20-year bond auction on Wednesday was met with weak demand, which saw the debt security fetch a yield of 5.047%, notably higher than the previous yield of 4.8% and one bps above where it was trading before the sale. Despite the weaker overall demand, foreign demand remained solid.

The sell-off in US Treasurys was part of a larger global bond sell-off; markets in Japan and Germany also saw a rise in yields because investors are expecting a greater bond supply in those markets. US yields often rise when foreign yields rise, as investors have more avenues to make returns on government debt.

The tax cut bill making its way through Congress has put US fiscal concerns back into focus, as the tax cuts could add between three and five trillion to the federal government’s $36.2 trillion debt. Large deficits push up Treasury issuance, sending worries that demand will not keep up with supply. As a result, investors are starting to demand higher yields now, before any extra bonds hit the market. In April, the Treasury Department said it expects to keep auction sizes steady for the next several quarters. However, given the size of the debt, the government will need to increase the size of its longer-dated debt auctions to continue financing the budget deficit.

The 10-year Treasury yield is 4.6%, and the 30-year yield is 5.1%. The spread between the two- and 10-year yields increased to 59 bps from 53 bps Tuesday.

CURRENCY FUTURES

The June US dollar index is higher in overnight trade as the greenback gained against most major currencies, picking up strength following positive news in the labor market. The dollar index fell Wednesday as worries over the US’s debt picture and weak demand at the 20-year Treasury bond auction weighed on the greenback.

June euro futures are lower, pressured by a stronger dollar and weak PMI figures. Eurozone composite PMI figures were weaker than expected, with a composite PMI reading of 49.5, lower than expectations of 50.7. Manufacturing and services purchasing managers index readings for May both came in lower than expected. Manufacturing PMI was 48.4 vs. expectations of 49.2, and services PMI was 48.9 vs. expectations of 50.4. The readings show a further decline in business activity for the region as sluggish domestic demand for services contributed to the weakness. A reading above 50 shows growth in activity, while a reading below 50 shows a contraction in activity.

June pound futures edged lower after the UK’s composite PMI for May came in just above expectations at 49.4, although the reading does show a decline in business activity. A decline in manufacturing activity was responsible for the decline, with a reading of 45.1 vs. expectations of 46.2. The services sector saw slight growth with a reading of 50.2, just above expectations of 50 and above the previous reading of 49.0.

Japanese yen futures are lower on dollar strength after PMI readings for the services and manufacturing sectors came in line with expectations, with the services sector posting slight growth with a reading of 50.8 while the manufacturing sector declined with a reading of 49.0.

STOCK INDEX FUTURES

Futures are lower across the indexes but have gained strength following better-than-expected initial jobless claims figures. Initial jobless claims came in lower than expectations, with a reading of 227,000, lower than last week’s figure of 229,000 and below the estimated 230,000. The labor market has held up well despite the economic pressures from tariffs, leaving questions as to when impacts from tariffs will appear in the labor market.

Investors continue to assess the fiscal outlook of the US’s growing debt situation after the House approved President Trump’s tax cut bill. Futures were lower Wednesday after the 20-year Treasury bond auction caught less demand than expected, accelerating a selloff in the debt and equity markets.

The EU has presented a trade proposal to the Trump administration this morning that includes phased tariff cuts on non-sensitive goods and extended cooperation on energy, AI, and digital infrastructure.

Figures for May’s Purchasing Managers Index for the US will be released at 8:45 a.m. Central Time, manufacturing PMI is expected to come in at 49.9, and services PMI is expected at 51.1. The reading will give an up-to-date indication of the health of the manufacturing and services sectors in the US, with the data most likely feeling the impact from tariffs. Most official US data has suggested that the economy is holding up well, although the data is backwards-looking and has not properly captured the impact of tariffs. Although many high tariffs have been scaled back, tariffs of 10% or more remain and are very high by historical standards.

Existing home sales for April are due at 9:00 a.m. Central Time, with sales of 4.15 million expected.

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