The Day Ahead: Bonds Steady as Aug 2 Approaches

The bond market remains steady despite continued uncertainty regarding the U.S. debt ceiling and a possible sovereign credit downgrade.

The benchmark 10-year Treasury note yield is one basis point higher at 2.962%, while the two-year is two basis points higher with a 0.410% yield and the 30-year yield is unchanged at 4.287%. Mortgages are however underperforming. The Fannie Mae 4.0 MBS coupon is -4/32 at 100-17.

In equities, the S&P 500 looks to open 3.25 points lower at 1,323 and Dow futures are down 7 points at 12,426.

"Market focus will remain on the U.S. until this crisis is resolved," said economists at BMO Capital Markets. "However, markets haven't forgotten about Europe's problems, as Spanish and Italian yields are up sharply across the curve. Spain 10-yrs are back above 6%, from a post-bailout low of 5.72%, while Italy 10-yrs are up to 5.76% from a post-bailout low of 5.34%." 

New economic data from Europe was mixed: Euro area Q1 GDP was confirmed at 0.8% quarter over quarter, but Germany's industrial production gauge missed expectations by dropping 0.6% in April following a 1.2% climb a month before. Moreover, German exports declined 5.5% in April, a substantial drop following a 7.2% increase in March. 

Meantime, earnings season continues today with releases from Dow Chemical, Visa and Boeing. BMO called the reporting season a healthy one so far, as "80% of S&P 500 companies have beaten earnings expectations."

Light crude oil fell 0.73% overnight to $98.86 per barrel, while COMEX gold prices rose 0.12% to $1,618.70 per ounce.

Key Events Today:

8:30 - Coming off a strong 2.1% jump in May, New Orders for Durable Goods are only expected to rise 0.3% in June. Recent strength has been helped by Boeing but economists have mixed views about its sales this month following the 49th Paris Air Show. To escape volatility from a possible drop in aircraft orders, economists will look at the ex-transportation component; this month it is anticipated to climb 0.5%, following a 0.7% gain the month before.

"Durables orders have remained one of the relatively few bright spots in US economic performance though the current summer soft patch, adding on about 7% year to date, with 2% of the orders expansion coming in May alone," said economists at Janney Capital Markets.

Added economists at Citigroup: "Durable goods orders likely were little changed in June, after some wild swings thus far this year. But the stability in the expected headline figure masks a decline in the turbulent transportation sector and a healthy increase in the more stable ex-transportation series. Once again, a drop in aircraft orders likely dominated the change in transportation orders, but a rise in motor vehicle assemblies probably tempered the downswing."

An opposite read comes from Nomura: "Durable goods orders should get a bit of a boost from additional orders placed at Boeing in June. The value of orders in categories such as primary and fabricated metals is expected to be held back somewhat by lower commodity prices. Overall, we expect durable goods orders to have increased by 0.8% in June, ex-transportation increasing by 0.6% and ex-defense by 0.3%."

2:00 - The Beige Book, the Federal Reserve' anecdotal summary of economic conditions across the country, should reflect another poor month of employment gains and give some much-needed commentary on where the manufacturing sector is following supply-chain disruptions from Japan.

Treasury Auctions:
1:00 - 5-Year Notes