Treasuries Erase Declines After Fed Minutes Lack Hawkish Slant

  • Feb. 1 meeting minutes deferred discussion of balance-sheet
  • Yields climbed after demand for five-year auction fell short

Treasuries erased declines Wednesday after the minutes of the Federal Open Market Committee’s Feb. 1 meeting left market-implied expectations for a March rate increase below 50 percent.

Yields were lower by about 1 basis point at 3:15 p.m. in New York. They had risen to session highs following tepid demand for a monthly auction of five-year notes. The minutes said many participants shared the view that a rate increase might be appropriate “fairly soon,” yet saw “only a modest risk” of inflation. The account of the last gathering deferred discussion of the policy of reinvesting maturing Treasury securities to “upcoming meetings.”

  • The minutes were “not hawkish enough to change the market’s opinion on the chances that this Fed acts aggressively and goes in March or May,” said Tom Roth, head of Treasury trading at MUFG Securities
  • March hike odds declined slightly after the minutes; based on 1st Fed OIS, March odds were 21% (vs 25% pre-minutes) while June odds fell to 95% (vs 100% pre-minutes)
  • 5s30s curve steepened to 112.5bp; it compressed from 120bp on Feb. 6 to 108.5bp on Feb. 15 amid rising market-implied odds of Fed rate increases this year
  • Regarding reinvestment policy, which came into focus when minutes of Fed’s Dec. 14 meeting included a mention of implications of rate increases for management of the Fed’s balance sheet, the minutes suggest a change “is not even imminent,” TD strategist Priya Misra said
  • Earlier, $34b 5Y auction tailed and produced low bid-to-cover ratio, signs demand fell short of expectations; notes were awarded at 1.937% vs 1.931% WI yield at bidding deadline, fifth of past six 5Y auctions to tail, according to Stone & McCarthy
  • 2.29 bid-to-cover was lowest since July, compares with 2.49 average for previous six
  • Lowest yield levels of the session were recorded in early U.S. trading as German 10Y traded at lowest levels since Jan. 5 , while U.K. 10-year yields traded at the lowest level since Nov. 9 amid dimming outlook for consumer spending
  • U.S. 10Y yield spreads vs U.K. and Germany approached widest levels this year
  • Treasuries followed European bonds lower after centrist rivals in France’s presidential election agreed on an alliance that erodes the odds of a victory by anti-euro nationalist Marine Le Pen
  • French-German 10Y yield spread collapsed to under 74 basis points after topping 83 basis points, a four-year high
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