Concerns about the housing sector will dominate the Treasury market next week, with the potential for lower yields after this week's successful Treasury auctions. But the rally, which began Thursday, may not have much farther to run. Investors have been watching Treasury yields closely as a clue to mortgage rates, and hoped-for improvement in the housing sector.
Data on Monday and Tuesday will address the housing market's short-term potential for recovery. Treasury yields dropped from highs of 2009 reached earlier this week on supply concerns. The benchmark 10-year note yield briefly touched 4 percent in the wake of Wednesday's sale of 10-year notes, the second of three sales of $65 billion in government debt this week.
The auctions were generally well received, but uncertainty about inflation and worries about the borrowing needs of the US government led investors to demand concessions in the form of higher yields at the 10-year sale. However, a rally was sparked by a better-than-anticipated auction of 30-year bonds Thursday, and that followed on Friday, lowering the 30-year yield to about 4.60 percent from a peak of 4.76 Wednesday.
This would be good news for the mortgage market, where interest rates have been rising in the last few months as government debt yields have increased. The National Association of Home Builders' Housing Index for June is expected to show a reading of 17 in a report to be issued on Monday at 1 pm ET. This index hit a trough of 8 in January and has been improving modestly since.
Housing starts in May are expected to have increased to a seasonally adjusted annual rate of 490,000, from April's rate of 458,000. But that rate still represents a 50 percent decline from the May 2008 rate of starts. Similarly, building permits are expected to increase to 500,000 from April, which would be a 51 percent decline from year-ago data. That report will be released Tuesday at 8:30 ET. Inflation data will also be important next week.
Two key inflation reports, the US producer price index, which measures inflation at the wholesale level, and consumer price inflation, are due out Tuesday and Wednesday, respectively. Thus far, inflation has not been a concern for the markets. This month's headline figures may be affected by the recent rise in crude oil prices, but core inflation is expected to remain subdued.
Core CPI, which removes energy and food prices, is expected to rise 0.1 percent. Core consumer inflation is up 1.9 percent in the last year. In the last week, so-called one-year 'breakevens' on Treasury Inflation Protected securities, which gauge the market's expectations for inflation, moved into positive territory, following similar moves in other maturities.
It suggests investors now see expect higher prices in a year, which had not been the case since September 2008. Other key data next week include US industrial output and capacity utilisation for May, due for release Wednesday at 9:15 am, and the Philadelphia Federal Reserve's regional economic survey, to be released on Thursday.