Should this be worrying the Fed?
Treasury prices continue to plummet, yields are rising. Yesterday saw a record $30bn auction of 5yr notes sell at a much higher yield than forecast – demand has been worryingly thin of late. The bid cover ratio in the 5yr notes action dipped to 1.8: high, but down from the average auction bid/cover of late, 2.12.
To put things into perspective: it’s actually been one of the worst months for US Treasury prices on record.
This week in particular has seen $78bn in notes and bonds issued. Nothing compared to the $2.5 trillion the US government is expected to have to sell in the not so distant future.
Part of the problem seems to be the rather rudderless policy statements coming from the Fed. Yesterday’s FOMC announcement was anticipated as an opportunity for the US central bank to give some kind of strong commitment to maintaining low yields. Instead of which, came a repetition of this rather wet formulation:
The Committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.
Informed comment, from Across the Curve:
The imminent refunding is a worry as the ink will barely dry on this round of issuance when the next round begins.
The House passed its version of a fiscal stimulus package yesterday and the reality is that when the Senate pases its version it will compel the need for even more money.
One trader noted,and I concur, that traders are now engaged in a game of financial chicken with Federal Reserve as traders attempt to force the Fed’s hand. The Fed has no desire for higher rates and the higher rates defeats the intent of the myriad of plans it has implemented to fight the financial crisis. I do not know what level on 5 year or 10 year notes would invite Federal Reserve coupon purchases. However, in this fragile environment such a level does exist and I think that the street will now probe to discern that level.
Probing which may well be corrected later today anyway, without the need for Fed intervention. Possibility of a slapdown: Q4 US GDP figures, out at 8:30EST (13:30GMT).