Back on May 22^nd we recommended adding duration and extending your portfolio. We like that even more heading into the auctions. The original reasons for our recommendation still stand, but let’s reiterate briefly why we are bullish on Treasuries here (and add a couple of twists).

Why?

• At this point the deficit from the budget is quite priced in. This is when people realize that as big as the number is, it does drift in over time.
• While I’m not a fan of tariff policy, it is generating income for the Treasury, and it will offset some of the deficit (and that is not being factored in).
• I expect some economic weakness to leak into the data. Tariff inflation, at these levels of tariffs, will take time to show up as inflation and it will be minor. My assumption is that for 10%, the exporters will absorb some. The importers will also absorb some, but as for what they plan on passing on, it will take some time as many prices are contractual and cannot be moved immediately.
  • We highlighted in Friday’s NFP Analysis that while the headline job number was “strong,” the details were far from strong. More and more people are questioning the validity of the birth/death model as the approach to getting an EIN (Employment Identification Number) has changed with the GIG economy in ways that the BLS has not figured out. If anything, we have mostly received notes from clients providing more information supporting our view that the jobs data will turn.
• We have 10-year and 30-year Treasury auctions today and tomorrow. There are some concerns about the auctions. The equity market certainly seems to be back to paying attention to the details of the bond auctions.
  • Traditionally dealers try to push yields higher into the auctions, and bonds do well after the supply is over.
  • Corporate supply, which indirectly affects Treasury yields, should also be slowing as we enter the summer.
  • Finally, and this is just a guess, but I bet that Lutnick and Bessent are working the phones to get a good auction. I have had disagreements with Mr. Lutnick on trade (anyone reading these notes may have noticed) but he did run Cantor, and Cantor is a primary dealer. He knows bond auctions. They both know the market is looking at the auctions to get a sense of where yields are heading. I’d be surprised if they aren’t spending some time on these “premier” auctions (the 10s and 30s are the “majors”). That’s what I would be doing if I was in their shoes.
• Finally, I continue to believe that the Fed will telegraph July as a “live” meeting and the rate cuts for the year will get pulled forward (and will be more than what is priced in). I like the idea of starting in July and getting 3 to 4 this year – which we outlined in more detail in this weekend’s T-Report.

Add duration. 30s are my favorite spot, but add duration, and extend your average maturity, even ahead of the auctions.

Corporates should do well too, though my bias would be towards the longer end.

DISCLAIMER