Fixed Income Recap

Treasuries sold off yesterday on a stock market that strengthened as the day wore on in addition to some selling in the market on continuing supply concerns. The curve continued its week long steepening trend to +268 bps as stronger demand for shorter term notes continues to buoy that portion of the curve. Foreign central banks are a major buyer of the short end right now, and with 2-, 5- and 7-year notes coming to market over the next three trading sessions the market is just rallying into the auctions. In early Tuesday trading the ten-year has already rallied back to where it was before yesterday’s selloff, the two year has made back half of its 4 basis point skid.

The $6 billion TIPS auction was bid fairly well. The auction was a reopening of the existing 20-year and came in about 5/64 cheaper than where the market was trading at the time. The yield came in at 2.387%, and the bid/cover for the auction was 2.27, higher than the last 20-year TIPS auction in January. Breakevens were mostly unchanged, wider by just 4 bps in afternoon trading.

$42 billion in 2-year notes will be auctioned today, $2 billion more than the last four 2-year auctions. Look for the indirect bid, the group of bidders that includes foreign central banks, to again dominate. Last month’s 2-year auction sent 68.7% of the bonds to indirect bidders – I wouldn’t be surprised if that number is even higher for today’s auction.


Cliff J. Reynolds Jr., Investment Analyst