The Treasury’s $42 billion 2-year auction was an overall positive to the bond market on Tuesday. Demand measures were just under the recent average for 2-year notes – bid/cover was 2.68 – but the yield came in just 1 basis point higher than the market. Bonds had sold off going into the auction but managed to rally on the results and better prospects for the remainder of this week’s supply.
A heavy selloff in crude oil (-3.12%) hurt TIPS today as breakevens tightened 8 basis points for second day in a row to 174 basis points – essentially where they were before their rally last week. I mentioned late last week that TIPS looked like they got a little ahead of themselves but I was suspecting a selloff in Treasuries to be the catalyst for the TIPS correction. Instead it was much better than expected Consumer Confidence Survey results that boosted the dollar and drove dollar hedges out of oil which in turn hurt TIPS. What a domino effect huh?
The Fed is scheduled to purchase Treasuries maturing between 8/15/2026 and 8/15/2039, a sector that stretches to the very back end of the curve. The Fed has averaged $3 billion in backend purchases per operation but most in the market has come to realize that the Fed will soon need to slow down their purchases significantly. I have heard estimates as low as $1.5 to $2 billion. I’m not sure how much these operations are affecting the market these days anyway, especially when they are accompanied with new Treasury supply and meaningful economic data.
A heavy selloff in crude oil (-3.12%) hurt TIPS today as breakevens tightened 8 basis points for second day in a row to 174 basis points – essentially where they were before their rally last week. I mentioned late last week that TIPS looked like they got a little ahead of themselves but I was suspecting a selloff in Treasuries to be the catalyst for the TIPS correction. Instead it was much better than expected Consumer Confidence Survey results that boosted the dollar and drove dollar hedges out of oil which in turn hurt TIPS. What a domino effect huh?
The Fed is scheduled to purchase Treasuries maturing between 8/15/2026 and 8/15/2039, a sector that stretches to the very back end of the curve. The Fed has averaged $3 billion in backend purchases per operation but most in the market has come to realize that the Fed will soon need to slow down their purchases significantly. I have heard estimates as low as $1.5 to $2 billion. I’m not sure how much these operations are affecting the market these days anyway, especially when they are accompanied with new Treasury supply and meaningful economic data.
Ben Bernanke was nominated by President Obama for a second term as Chairman of the Federal Reserve Board while being praised for his “calm and wisdom” during the financial crisis. But monetary policy must come full circle before Bernanke’s story is finished. Reappointing Bernanke for the sake of continuity during this cycle removes a hurdle, albeit a small one.
Cliff J. Reynolds Jr., Investment Analyst
Cliff J. Reynolds Jr., Investment Analyst
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