Bond Recap

A disappointing Nonfarm Payrolls number forced short-term yields lower on Friday as the two-year finished below 1% for the first time since 6/4. Unlike long term interest rates, which are primarily influenced by inflation, short term rates move more with expectations of Fed policy, namely the Fed’s manipulation on the Fed Funds Target Rate. As expectations grow for an improving labor market, so will expectations for a turnaround in Fed policy. The two year sold off throughout June as some in the market believed the Fed was moving closer to raising Fed Funds from their current target of 0-.25%, but the optimism proved to be too much too fast as we have moved back to where we began the month. The graph below recaps the last 60 days on the 2-year.

Supply yet again comes to the forefront this week with $73 billion being auctioned, including $8 billion in ten-year TIPS. Although the dollar amount is far from the $100+ billion weeks we have seen so far this year, the market will have to deal with 4 days of auctions in one week for the first time.

Cliff Reynolds