Fixed Income Recap

The Fed buoyed the front end of the curve with their $6 billion purchase of 2-3 year notes yesterday. The purchase was right in line with the average for that section of the curve, but a bit higher than expectations. The Fed needs to spread the last $32 billion of the $300 billion over the next 8 weeks, so we should expect less frequent operations or smaller sizes going forward. The Fed announced at the last FOMC meeting that the program will be slowed down to end in October, a month later than originally planned, but has yet to adjust the pace of the program.

TIPS had a rough go of it yesterday, losing ground to nominal coupon Treasuries throughout the day with 10-year breakevens ending the day 8 bps tighter. TIPS ran pretty hot last week despite the selloff in nominals, so most of yesterday’s movement was just a correction. Like everything in bond land lately, TIPS are range bound. The spread between the real yield on 10-year TIPS and the 10-year Treasury’s nominal yield has bounced around the 150-200 basis point range since March, and will probably continue to move within that range as sentiment drifts.

The second batch of Treasury supply is scheduled to begin today with $42 billion in new 2-year notes. Two-years are flat as of this writing.


Cliff J. Reynolds Jr., Investment Analyst