Treasury Yields Stable as Inflation Data Looms

1559 ET – Bond markets remain on watch-and-see mode ahead of inflation data and while U.S. and China negotiate a potential trade deal. A three-year Treasurys auction shows little change in demand. A 10-year tender is scheduled for tomorrow, followed by a 30-year auction Thursday, as markets worry about foreign appetite for U.S. assets. Economists surveyed by WSJ expect 12-month May CPI to print 2.4% tomorrow, up from 2.3% in April. The core reading is forecast at 2.9%, up from 2.8%. PPI is due Friday. The 10-year yield falls 0.009 percentage point to 4.472% and the two-year rises 0.007 p.p. to 4.010%. ( paulo.trevisani@wsj.com ; @ptrevisani)

Treasury Yields Fall Amid U.S. Small Business Optimism

0842 ET – An uptick in small business optimism brings some relief to bond markets bracing for rising inflation indicators later this week. Yields are down ahead of today’s three-year Treasury auction likely to be closely watched for potential signs of weakening demand. U.S. officials indicate trade talks with Chinese counterparts in London are going well. Social unrest in Los Angeles continues, but with no signs of an economic impact that could jitter financial markets. The NFIB index of small business optimism rises to 98.8 in May from 95.8 in April. The 10-year is at 4.448% and the two-year at 3.989%. ( paulo.trevisani@wsj.com ; @ptrevisani)

Weak Treasury Auction Could Send Dollar Lower Again

0909 GMT – The dollar rises but its fortunes could turn if Tuesday’s $58 billion three-year Treasury note auction is weak, says ING’s Chris Turner in a note. “A poor auction could rekindle the weaker dollar story,” the global head of markets says. If non-U.S. investors are looking to reduce exposure to dollar-denominated assets, there’s a risk that they might not reinvest in new bonds as their Treasury holdings mature, he says. Turner notes that foreigners own around 25% of the outstanding Treasury supply. The DXY dollar index rises 0.3% to 99.218. The three-year Treasury yield falls 2 basis points to 3.965% ahead of the auction, according to Tradeweb. ( emese.bartha@wsj.com )

Japan’s April Sale of Bunds, U.S. Treasurys Likely Due to Fiscal Year-End

0631 GMT – Japanese investment data showing the sale of German Bunds and U.S. Treasurys in April has multiple reasons, including the end of the fiscal year, says Citi Research’s Aman Bansal in a note. The sale of 9.1 billion euros in Bunds in April, was the largest since 2015, while U.S. Treasurys saw more than $8 billion of sales, he says. “This could possibly be related to the fiscal year-end [on March 31], German fiscal concerns or simply repatriation following the increase in long-end Japanese government bond yields,” the rates strategist says. However, the data didn’t show any signs of allocation out of dollar assets towards euro assets. “Ahead, the pressure to repatriate might persist,” given the high JGB yields, he says. ( emese.bartha@wsj.com )

U.S. Treasury’s Three-Year Note Auction Seen Easy to Absorb

0538 GMT – The U.S. Treasury’s three-year note auction should see a smooth takedown, while longer-term debt auctions might face more challenges this week, says Pepperstone’s Michael Brown in a note. The $58 billion offer of three-year notes on Tuesday “should be digested easily,” the senior research strategist says. Meanwhile, Wednesday’s $39 billion auction of 10-year notes and Thursday’s $22 billion sale of 30-year bonds represent “much bigger tests,” he says. Extending Monday’s fall, the 10-year Treasury yield declines 2 basis points to last trade at 4.465%, according to Tradeweb. ( emese.bartha@wsj.com )

Foreign Investors Like Eurozone Govt Bonds, Especially Italy’s

0540 GMT – Foreign investors’ appetite for eurozone government bonds is heightened, with Italy a key beneficiary, Societe Generale’s rates strategists say in a note. Inflows are stronger than usual to Italy, they say. This should keep Italian government bonds, or BTP, yield spreads over German Bunds and French OATs relatively narrow, they say. Even more compression is possible, given the absence of major idiosyncratic risks in Italy, they say. ( emese.bartha@wsj.com )