Treasuries Finally Find a Bid

  • On Fed Day, Treasuries are finally finding a bid as news that the ECB convened an emergency meeting added a flight-to-safety bid into the Treasury market.
  • The ECB is worried that some of its peripheral members are seeing yield spreads significantly widen as they prepare to hike rates and that could threaten financial stability. Specifically, Italian bond spreads blew out in the last week and that prompted the emergency meeting where the ECB is likely to announce they are prepared to renew their asset purchase program targeting those bonds that have experienced recent turbulence.


  • Meanwhile, back in the States, investors prepare for a Fed announcement at 2pm ET where the primary intrigue is whether we see a 50bps or 75bps hike.  Futures markets are slightly favoring a 75bps hike right now but the advantage has slipped a bit from what it was yesterday.


  • Also, the futures market sees the funds rate reaching 3.6% by December, or about 260bps in hikes spread across five FOMC meetings.


  • The other big feature of today’s meeting will be the updated economic and rate outlook from the Fed. The March meeting had fed funds peaking at 2.75% in 2023 and 2024. That will no doubt be revised higher, it’s just a question of how high? The futures market sees it peaking at  4.25% in the first quarter of 2023 before rate cuts start occurring in the latter part of the year. It’s much too early to put any of that in stone but it’s interesting to see the market seeing a rather quick rate hiking cycle followed by a brief pause then rate cuts commencing. We’ll see if the FOMC agrees in their dot plots. We doubt they will be as quick in their cycle projections as the market. In any event, we’ll be back later today with a summary of the meeting.


  • Almost getting lost in the FOMC and inflation talk, May retail sales numbers were released this morning and they were softer than expected. Overall sales were down -0.3% vs. 0.1% expected and 0.7% in April. Sales ex auto and gas were up just 0.1% vs. 0.4% expected  and 0.8% in April. The control group sales (a direct feed into GDP) were unchanged on the month vs. 0.3% expected and 0.3% in April. Incidentally, all those April sales numbers were revised lower. Also keep in mind the sales numbers are not inflation-adjusted which makes the real sales figures even softer.  One month does not a trend make but will we look back at May as the turning point for consumer consumption in 2022 or will it just be a lull before the summer spending season?


  • Also boosting Treasury prices was the latest import/export price report which came in better than expected.  Import prices for May rose 0.6% vs. 1.1% expected and 0.4% in April. However, imports ex petroleum fell -0.1% vs 0.6% expected and 0.5% in April. It’s the first decline in this series since November 2020.


  • Export prices continued to rise reflecting the strength in the dollar in overseas transactions. Exports rose 2.8% for the month and a healthy 18.9% year-over-year. Those high export prices will likely lead to diminished sales which will continue to be a drag on GDP.


  • Speaking of GDP, the Atlanta Fed’s GDPNow forecast for second quarter is for a nearly flat 0.8% increase. After they adjust for the latest retail sales figures mentioned above will that figure turn negative? We shall see.


Source: Bloomberg


Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 3.36 3.55 3.64 3.79 3.95 4.41
0.50 3.34 3.52 3.58 3.68 3.80 4.30
1.00 3.34 3.49 3.55 3.63 3.72 4.17
2.00 3.48 3.49 3.55 3.60 NA
3.00 3.51 3.54 NA
4.00 3.49 NA
5.00 3.45 NA
10.00 NA

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Published: 06/15/22 Author: Thomas R. Fitzgerald