Fixed Income Recap

Treasuries
Treasuries traded wildly today on news from the Fed (more on that below). The two-year finished the day down 1/32, and the ten-year was lower by 13/32. The benchmark curve was steeper by 3 basis points on the day and remains at +179 bps. A basis point represents .01%.

Today’s two-year note auction went better than expected. The notes were sold at a yield of .949% with 53.1% of the auction being bid indirectly (foreign buyers). The news is full of reports of fear that foreign buyers will soon exit the Treasury market, leaving no one to buy our country’s debt. Auction results like these certainly lead me to think otherwise.

Federal Reserve Open Market Operations
Last week’s announcement of increased Fed buying over the next nine months was set to be the market driver this week. That of course was before Monday’s toxic asset plan announcement (I’m still calling it that). However, around 1:45 central the Fed announced that tomorrow it will start to purchase Treasury notes maturing between February 2016 and February 2019, which attracted the market’s attention yet again. I saw this as no real surprise because a target of the middle of this week was announced when the plan was unveiled last Thursday. Nonetheless the ten-year rallied from down 3/4 of a point to unchanged immediately on the news.

I’m a little confused why the Treasury would come right out and announce this so specifically. I understand the market must be informed of the general plan, but what’s the benefit in allowing everyone to front-run you on billions of dollars of trades. But then again, if you were spending someone else’s money would you care?

TIPS
Treasury Inflation Protected Securities weren’t mentioned in today’s announcement but still rallied. The on-the-run ten-year rallied .29% and the TIPS ETF (TIP) was up .57%.

Have a great evening.

Cliff J. Reynolds Jr.
Junior Analyst