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US Treasury Yield Auction Shows Fed Rate Speculation Cooling

US Treasury Yield Auction Shows Fed Rate Speculation Cooling

Varun Jaitly, Contributor

Talking Points:

  • US Treasury 3 and 6 month yields decrease at February 8th auction
  • Treasury yields suggest market is pricing in fewer rate hikes for the year
  • Markets diverging from economic data to sentiment as risk off continues to grow

U.S. 3 and 6 month treasury bills saw yields slightly decreased at the latest weekly auction of the short term bonds. Like the Fed Funds rate, these short term government bonds offer an investor forecast of monetary climate. Although the decrease was marginal, the context of recent government bond yields’ retreat and struggle from the Dollar among other markets suggest it is another reflection of doubt for impending FOMC hikes. The bid to cover ratio has recovered somewhat compared to December. As demand for these low yielding finance products rises despite their lack of return, it suggests the market sees a lower probability of higher rates (fewer or no Fed hikes) into the future. Given the debate of Fed timing, the 3 and 6 month bill auctions can be useful within this context.

The recent market sentiment and Fed Funds suggest that investors believe the probability of another hike this year – much less three to six months out – is very low. With that in mind, the coming FOMC meetings are still very important to yields, as despite markets’ skepticism, data has been strong. Last week alone, Manufacturing PMI came in at 48.2 beating expectations, and PCE remains at 1.4%. The unemployment rate also dropped to 4.9%, a figure not seen since 2008.

As data continues to come through over the next 3 to 6 months, the market’s reaction towards that data with consideration to rates will be important. Current market sentiment is clearly including more than just US economic data, the level of skepticism to FOMC forward guidance will narrow one way or the other. The result will be a reassessment of speculative positioning and valuation for assets such as equities and the US Dollar.

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