Yesterday was without an economic release resulting in a slow, low volume day in bond land. The snail like pace will continue today as most of the market is waiting to hear if the FOMC will say anything big following the conclusion of their policy meeting on Wednesday.
It’s a foregone conclusion at this point that the Fed Funds rate will remain where it is for this meeting, a target rate of 0-.25%, but futures have shown an uptick in amount of people expecting an increase soon. Current data show that the market is leaning toward an increase in the Fed Funds rate to .50% by the January 27 meeting. If that were correct it would mark the first increase in the rate since June 2006 when it topped out at 5.25%, and would also be the first adjustment to the rate since December 2008 when it was floored.
Shorter-term yields have been on a steady rise since early July when the 2-year reached .904% on July 13. The same bond was yielding 1.222% after yesterday’s rally from 1.302% at the close of last week. While long term yields react more to inflation expectations, short term yields are more sensitive to Federal Reserve policy, and the recent rate movement is showing this increased chance of a Fed policy reversal. It is important to note that the recent selloff in the short end can be partially attributed to poor auctions in late July, but expectations for a reversal in Fed policy coming sooner rather than later made that section of the curve unfavorable at lower yields. The FOMC comments tomorrow, retail sales data on Thursday and CPI on Friday could make for a bumpy ride later this week.
CIT
Just to touch on a brief piece of news from last Friday that I missed in yesterday’s recap, CIT announced that it will be suspending dividends on its preferred stock effective immediately. CIT hasn’t had to pay preferred dividends since June 15, but since one of its issues was due to go ex on Friday they announced the suspension of dividends for all preferred stock. This is no surprise to the market - the market prices for the issues were unaffected by the news – but the move is expected to save CIT $50 million dollars each quarter, a drop in the bucket compared to the $10 billion in debt that is scheduled to come due in the next 18 months. The company currently has no prospects for refinancing their maturing debt, and has also drawn on the final $1 billion of the $3 billion in emergency financing they secured on July 20.
Cliff J. Reynolds Jr.
It’s a foregone conclusion at this point that the Fed Funds rate will remain where it is for this meeting, a target rate of 0-.25%, but futures have shown an uptick in amount of people expecting an increase soon. Current data show that the market is leaning toward an increase in the Fed Funds rate to .50% by the January 27 meeting. If that were correct it would mark the first increase in the rate since June 2006 when it topped out at 5.25%, and would also be the first adjustment to the rate since December 2008 when it was floored.
Shorter-term yields have been on a steady rise since early July when the 2-year reached .904% on July 13. The same bond was yielding 1.222% after yesterday’s rally from 1.302% at the close of last week. While long term yields react more to inflation expectations, short term yields are more sensitive to Federal Reserve policy, and the recent rate movement is showing this increased chance of a Fed policy reversal. It is important to note that the recent selloff in the short end can be partially attributed to poor auctions in late July, but expectations for a reversal in Fed policy coming sooner rather than later made that section of the curve unfavorable at lower yields. The FOMC comments tomorrow, retail sales data on Thursday and CPI on Friday could make for a bumpy ride later this week.
CIT
Just to touch on a brief piece of news from last Friday that I missed in yesterday’s recap, CIT announced that it will be suspending dividends on its preferred stock effective immediately. CIT hasn’t had to pay preferred dividends since June 15, but since one of its issues was due to go ex on Friday they announced the suspension of dividends for all preferred stock. This is no surprise to the market - the market prices for the issues were unaffected by the news – but the move is expected to save CIT $50 million dollars each quarter, a drop in the bucket compared to the $10 billion in debt that is scheduled to come due in the next 18 months. The company currently has no prospects for refinancing their maturing debt, and has also drawn on the final $1 billion of the $3 billion in emergency financing they secured on July 20.
Cliff J. Reynolds Jr.
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