Fixed Income Recap

Yesterday’s gains in the Treasury market were all but wiped out today as Fed again failed to reign in long term rates on an auction day. The two-year finished down 3/32, and the ten-year was lower by 4/32. The curve steepened 3 basis points on the day, and currently sits at +258 bps.

Bonds took a beating today after a well bid auction came in at a higher than expected yield. The bid/cover ratio for the auction was 2.62, higher than the 2.5 average, and the high yield on the reopened note was 3.99%, 5 basis points higher than where they were trading in the secondary market.

Long term rates have been on the rise for a while now. The Fed’s efforts to keep long term rates low through Treasury purchases have failed, or maybe without the Fed the ten-year would be at 5% instead of 4%. Who knows? But short term rates have followed the longer end of the curve higher in the past week, on speculation that the Fed might reverse trend and raise short term rates.

The 45 basis point spike in the yield on the two-year is way too much, way too quick in my view. The Fed is only 40% through the MBS buying program that is scheduled to take until the end of the year, and 50% through the Treasury buying program that should be wrapped up by late summer. I just can’t see the Fed hiking short term rates while still forcing the long end lower, especially since most recent FOMC meeting commentary still noted concern for less than healthy levels of inflation in the near future and the need to keep the federal funds rate at exceptionally low levels for an extended period of time. This more than likely represents a buying opportunity in the short end.

Have a great evening.

Cliff J. Reynolds Jr., Junior Analyst