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Updated on May 29, 2025 10:06:47 AM EDT

Yesterday's 5-year Treasury Note auction was uneventful with a majority of the benchmarks pointing to an average level of demand from investors compared to other recent sales. One bright spot was a stronger interest from international investors than previous auctions. This led to a small improvement in bonds after results were posted at 1:00 PM ET, but it wasn't enough to cause an intraday improvement in rates from most lenders. Many opted to wait for the afternoon's second event or this morning's pricing to reflect that minor move. This scenario will be repeated today with results of the 7-year Note auction being posted at 1:00 PM also.

The minutes from the May 6 and 7 FOMC meeting were posted at 2:00 PM ET yesterday. They indicated Fed members are growing more concerned about a weakening employment sector and possible recession for the U.S. economy (reasons to lower key short-term interest rates) while also being confident inflation not only will rise under pending tariffs, but may also remain persistently high rather than just a single reactive move. The latter would justify raising key rates instead of cutting them. This scenario puts the Fed in a difficult position and makes it hard to predict what their next move may be with monetary policy. Since there were some good and bad points in the minutes, bonds only had a minor reaction to the release. However, this meeting took place a week before President Trump dropped or delayed the heaviest tariffs. The next FOMC meeting is set for June 17 and 18th and who knows what the tariff situation will be at that time, especially after last night's news on the topic (see below).

The first of this morning's two economic reports was last week's unemployment update at 8:30 AM ET. It showed new claims for jobless benefits rose 14,000 from the previous week's revised 226,000 initial filings. The 240,000 initial claims exceeded forecasts of 230,000 by a pretty good margin. Since rising claims are a sign of weakness in the employment sector, this report can be labeled good news for bonds and mortgage rates.

Also released early this morning was the first revision to the 1st Quarter Gross Domestic Product (GDP) reading. It was revised from the initial estimate of down 0.3% to down 0.2%. This means the economy did contract slightly during the first three months of the year, but at a tad slower pace than previously thought. A stronger than expected economy is generally bad news for bonds and mortgage rates. That said, a secondary reading within the report that is related to consumer spending and inflationary pressures was revised noticeably lower. Furthermore, this data is considered to be somewhat aged at this point since it covers the January through March months. Both have prevented a stronger reaction to the news.

It is not today's economic data that is fueling the early bond gains. Headlines overnight that nearly all of President Trump's tariffs have been ruled illegal and unconstitutional by the U.S. Court of International Trade in New York are driving trading this morning. His administration is appealing the ruling, so we don't know when there will be finality to the issue since the case will take time to wind through the Federal courts and will undoubtedly end up at the U.S. Supreme Court eventually. In the meantime, it appears bond traders are relying on the theory that lower tariffs and product costs will help keep inflation lower. It is important to note that this is just the initial knee-jerk reaction to the news. Bonds have been quite unpredictable over the past few months as tariffs were helpful for mortgage rates at times and bad news at other times.

Tomorrow brings us two more pieces of economic data, one being considered highly important to the bond market and mortgage rates. April's Personal Income and Outlays report at 8:30 AM ET is the more influential release of the two. The main part of the report gives us an indication of consumer ability to spend and current spending habits. A rise in income means that consumers have more money available to spend. Since consumer spending makes up over two-thirds of our economy, this data can cause movement in the financial markets and mortgage rates. Current forecasts show a 0.3% increase in the income reading while spending rose 0.2%.

What makes tomorrow's early report so important are the Personal Consumption Expenditures (PCE) indexes in it, that the Fed relies heavily on as their preferred gauge of inflation. Both the overall and core PCE readings are expected to rise 0.1% for April. The overall is predicted to have slipped 0.1% year over year with the core data being unchanged over the same period. Weaker PCE numbers, particularly on an annual basis, would be taken as good news for bonds and mortgage rates.

The last mortgage-related data of the week will come at 10:00 AM ET tomorrow when the University of Michigan posts their revised Index of Consumer Sentiment for May. This type of data is watched fairly closely because when consumers are feeling more confident about their own financial situations, they are more likely to make a large purchase in the near future. Rising confidence and the higher levels of spending that usually follow are considered negative news for bonds and mortgage rates. Tomorrow's report is expected to show a small upward revision from this month's preliminary reading of 50.8. A much higher reading would be considered bad news for bonds and mortgage pricing while a large downward revision should help boost bond prices and lead to a slight improvement in rates.

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