Fixed Income Recap

A 5-year auction and Fed buying combined for a long end rally and a flatter curve in Wednesday’s trading. Demand for five-year notes was strong yesterday, bid/cover for the auction was 2.51, stronger than the 2.33 average for the past 4 auctions. Only $2.3 billion in long Treasuries were purchased by the Fed yesterday, well under the $3 billion average for that operation. The market will begin to look closely to see if the Fed continues to slow down their Treasury purchases. While we are on the open market operations front, Richmond Fed President Jeffrey Lacker mentioned in a speech this morning that the Fed may not need to purchase the full $1.25 trillion in agency MBS, sighting an economy expected to grow later this year and improving financial conditions. This is the first mention of this that I have heard, and would certainly be a big step towards “the exit” for the Fed if they in fact ended the program early.

In the docket for today is $7 billion in 7-year notes and the release of the Fed’s MBS purchases from the past week. I don’t expect to see any changes going forward in the MBS program despite Lacker’s comments.

Cliff J. Reynolds Jr., Investment Analyst