Prices of Treasury coupon securities have sagged in overnight trading and the yields on most of the benchmark issues have risen 4 basis points. The motivating factor behind the move is angst about central bank monetary policy and the possibility that the US central bank might drain liquidity via reverse repos.
On Friday, rumors of an emergency Fed meeting about reverse repos traveled through the market. The report said that the Fed was talking with dealers about balance sheet capacity to absorb the (large I suppose ) operation.
The weekend press magnified the story as Barron’s ran a story calling for the Federal Reserve to hike rates. I reiterate the stance I have taken here many times. Maybe I am being stubborn, but it is inconceivable to me that the FOMC would initiate a policy to reduce liquidity when the unemployment rate is nearly 10 percent. The FOMC in it s most recently released minutes specifically related its concerns about the labor market and saw it as a persistent headwind well into the future.
About this time one year ago, the financial system was in the midst of a global nervous breakdown. We barely avoided the abyss. The Federal Reserve is run by a man who spent his academic career studying the Great Depression. His background and experience would make it very difficult for him to do anything other than leave rates very low for a very long time. I do not believe that he will drain liquidity until that is a clear and unambiguous choice and that time is not now.
The yield on the 2 year note increased 4 basis points to 0.99 percent. The yield on the 3 year note climbed 4 basis points to 1.54 percent. The 5 year note also experienced a 4 basis point rate hike to 2.39 percent. The 7 year note and the 10 year note each rose 4 basis points in yield to 3.03 percent and 3.45 percent, respectively. The yield on the Long Bond bucked the trend and climbed 3 basis points to 4.27 percent.
The 2 year/10 year spread is 246 basis points.
The 10 year/30 year spread is 82 basis points.
The 2 year/5 year/30 year spread is 48 basis points.
On Thursday supply will become a factor as the Treasury will announce the monthly ration of 2s, 5s and 7s. That package will be in the $110 to $ 15 billion zone. For those inhabiting a spot on the grassy knoll this will be the first batch of issuance since the springtime in which the Federal Reserve will not be the deus ex machina for owners of this paper.