Some Nuance Enters Fed Comments

  • After rallying down some 18bps in 10yr yields this week, today’s early trading is giving investors back some basis points as a slightly risk-on mood greets traders on a Friday. Positive earnings from Netflix and Alphabet looking to trim jobs has equities trading higher with offsetting selling in Treasuries. The 10yr currently yields 3.46%.  It touched an overnight low of 3.32% on Thursday. Meanwhile, the 2yr yields 4.18% compared to a low for the week of 4.03% as it scoffs at the notion of the Fed holding rates above 5% for the balance of 2023.


  • Speaking of the Fed, Governor Lael Brainard spoke yesterday and while she hit most of the obligatory hawkish notes, she did allow a bit of nuance to enter the conversation and that’s something we’ve been waiting to see. While she did say that rates will have to continue higher, and stay there longer, she did offer up that labor and wage pressures appear to be moderating, as well as inflationary pressures, and with the combined but delayed impact of higher policy rates, further improvement in both is expected. Thus, a brief acknowledgment that the tightening rate actions to date are indeed working, and that’s something that Fed officials have been hesitant to say lest they tempt looser financial conditions.


  • We have two more Fed speakers today (Waller, voter) and (Harker, voter) so expect more headlines before we hit the quiet period next week. Also, with Waller being a former economic researcher at Bullard’s St. Louis Fed we suspect he’ll continue to strike a more hawkish tone than what Brainard offered up yesterday.


  • With talk of the debt ceiling being reached, and the Treasury taking “extraordinary” measures to keep issuing debt, Treasury Secretary Yellen talked of a June timeframe when all her accounting tricks will have been played out. We suspect that could be a conservative estimate to get Congress to act sooner rather than later. But as we saw in 2011, this will likely go down to the 11th hour with Congressional Republicans aiming for spending cuts in the negotiations. So, while fiscal policy has been stimulative for the last couple years, it’s likely to turn not only neutral but into an economic headwind in the current political climate.


  • Speaking of the Treasury, with the debt ceiling drama just getting started, it didn’t apparently impact near-term demand as all three Treasury auctions went well this week. With a weaker dollar of late, it’s speculated that foreign buyers are back, particularly Japan, and that bodes well as a new pillar of support in the Treasury market. With the dollar surging last year under the push of the Fed’s rate hikes, it kept many foreign buyers sidelined given the high cost to hedge the foreign currency risk.  With the Bloomberg dollar index off nearly 9% from its September high that should entice foreign buyers of Treasuries and US goods too.


Bloomberg Dollar Index


Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 5.00 4.70 4.65 4.64 4.80 5.26
0.50 4.98 4.67 4.59 4.53 4.65 5.14
1.00 4.98 4.64 4.55 4.49 4.56 5.02
2.00 4.63 4.50 4.41 4.45 NA
3.00 4.36 4.38 NA
4.00 4.34 NA
5.00 4.30 NA
10.00 NA

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Published: 01/20/23 Author: Thomas R. Fitzgerald