The Treasury market is trading slightly lower this morning as higher yields are becoming more of the “norm” vs. just another uncomfortable short-term event. Yesterday’s 2-year note auction is a microcosm of what looks to be a longer than expected move to higher rates. When you get the worst coverage ratio since December of 2016 (2.44 times), and only a moderate indirect bid (40%), it starts to take its toll on the longs. Today the Treasury will sell $38 billion of 5-year notes and tomorrow $31 billion of 7-year notes. At some level, maybe it’s here or maybe it’s not, buyers will step in. So we may get an upside surprise from either of these auctions. The market’s focus now turns to the Fed. The FOMC meets tomorrow and they are widely expected to raise rates. The more interesting part of the meeting will likely come afterwards when the Fed Chair makes his comments. In those comments will probably be the information that traders need most, and that is how the committee feels about the forward view of interest rates. The burning question will be: will the Fed raise rates in December and how many times will they potentially raise rates in 2019? Beyond the Fed, the markets next response will likely come from…the data. Most of the key economic numbers come after the FOMC meeting, and there are a couple of them that could impact the volume and likely the volatility of the next trade. Those are Personal Income/Spending and the Core PCE on Thursday. For the bond market, the centerpiece to the future of rates trading remains with the level of inflation. If the data doesn’t support an upward trend, then long rates could fall back by 5-10 basis points. Conversely, if the trend is confirmed, then don’t be surprised to see a move towards 3.25% in the 10-year note. While the signs continue to point to sustained economic growth, rising or plateauing costs are likely the Pandora’s Box of what happens next in the wonderful world of fixed income investing!
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