Fixed Income Weekly

The bond world has been a busy one lately. The situation in Greece has been very volatile, which is understandable considering the conflicting opinions in the market and the “contagion” type effect a Greek default could have within the Eurozone and beyond. Chairman Bernanke’s testimony was as expected, but still meaningful as Big Ben confirmed the need for exceptionally low interest rates for a considerable amount of time, in addition to the importance of the Fed’s role as the primary regulator of the banking system.

Treasuries have been fighting two separate battles. One is Fed policy. The short end has been bouncing around within a tight .7%-1.1% range for 6 months now. The hike in the discount rate last week brought about a kneejerk move higher in short-term yields, but after much nay saying by policy makers they have settled down to just about where they were before the Fed made the change. The Fed remains very unconcerned with current levels of inflation, Q4 PCE was 1.6% annualized versus 1.4% in Q3, but longer term effects of current policy have the market demanding much higher yields on the long-end, which explains the record high spread between 2s and 10s of 291 basis points on Monday.

Secondly, the budget/credit/currency issues in Europe are pushing money into dollars, and in turn Treasurys. It’s the typical safety trade really. It sure helped with the $126 billion the Treasury had to sell this week, which all traded through the “when issued” yield, a sign of better than expected demand.

Next week is full of more Fed speak, which should get the market jumpstarted after closing on a very quiet note (relatively) this week.

Have a good weekend.

Cliff J. Reynolds Jr., Investment Analyst