Fixed Income Recap

Last week’s rally in Treasuries continued on Monday, driving yields lower as the ten-year finished below 3.5% for the first time since May 29. The long end of the curve continues to outperform and the flattening trend that has persisted since the beginning of June is showing no sign of stopping. The benchmark curve, the difference between the yield on the 2-year and 10-year Treasuries, finished yesterday at 238 bps, down from 275 bps on June 4.

Inflation expectations have pulled back recently. The Ten year TIPS Breakeven Rate, a number derived from the difference in yield between the ten-year inflation protected Treasury and the nominal Treasury that is used as a proxy for inflation expectations over the next ten years, has fallen to 1.7% from 2.08% just three weeks ago. As traders feel inflation expectations are overblown, they move into long term Treasuries, forcing prices up and yields down.

There is no Treasury supply coming this week but the Treasury will hold auctions every day but Friday next week. Expectations are for $65 billion in nominal coupon supply, pretty light by today’s standards, plus a TIPS auction on Monday. Official auction sizes are not yet available on Bloomberg.

Cliff J. Reynolds Jr., Junior Analyst