Fixed Income Recap

Long-Dated Treasuries Drop
The curve steepened 15 basis points today to 170 basis points as the 2-year rallied 3/32 of a percentage point in price to yield .77% and the 10-year sold off about one percent to yield 2.48%.

There are multiple factors negatively effecting Treasuries on a broad scale, I will try to touch on a few of them here.

Obama’s stimulus plan will leave the government hungry for cash, thus increasing the supply of Treasuries coming to market. Even with the Federal Reserve increasing its purchases through open market policy, the demand for the paper just doesn’t seem to exist at these yields. The yield on Treasuries, and the cost for financing the stimulus will go up as a result.

Treasuries are beginning to look rich to other markets around the world as foreign investors continue to become a lower percentage of the bidders at Treasury auctions. Over the past month the dollar has weakened 5.15% to a basket of global currencies according to the DXY Index and the CRB Commodity Index is down 45% from June 30th of last year, while gold is down less than 9% over the same period. If these factors draw more foreign investors away from US Treasuries, via a weakening dollar, demand for U.S. Government debt will continue to struggle to find a buyer.

If, or when, depending on who you ask, rapid inflation from excessive easing comes about, it will drive people even further from long bonds. Increasing concerns about inflation can cause large swings in the price of loner dated Treasury bonds. Although they are considered riskless from a credit standpoint, long duration bonds can be very volatile securities, as can be seen by the 3.7% drop in the thirty-year Treasury today.


Cliff J. Reynolds Jr.
Junior Analyst