Fixed Income Weekly

A fairly slow week was highlighted by comments from the FOMC and February’s CPI reading that flattened the curve as short-term yields and long-term yields moved inversely to each other. The two-year Treasury yield rose 4 bps to .99% while the ten-year fell 2 bps to 3.68%.

Consumer prices were unchanged in February from the previous month, versus an expected .1% rise, the first time the index didn’t print a positive change since last March when prices fell -.1%. The actual reading missing expectations by .1% isn’t huge news, but a larger trend of decreasing inflation expectations made its presence felt in the marketplace this week. Breakeven yield’s, which measure the spread between yields on TIPS and nominal Treasurys, fell steadily throughout the week. Ten-year breakevens fell 7 basis points to 220 as investors demanded higher real yields while nominal yields fell. Some of the movement on the long end of the curve is due to some positioning before next week’s $118 billion in Treasury issuance but words from the Fed this week also had an impact.

The “extended period” language was left unaltered, which indicates that the Fed intends to keep rates where they are for at least the next 4-6 months. A fed hike in early 2010 was a popular thought last fall, but any chance of that has been put off until the summer at the soonest. Implied probabilities point to a 28% chance of a hike to .5% by the August meeting, lower than the 50% chance the market was assigning to that at the beginning of the year. Regardless, removal of the “extended period” language will have to come first. If you follow the 4-6 month buffer between the removal of the language and the actual hike, the language will have to be dropped after the next meeting if we are to get a hike in the summer.


Have a good weekend.

Cliff J. Reynolds Jr., Investment Analyst