- Pelosi says she is closing in on a deal with Mnuchin, while McConnell provides a possible opening
- Fed’s Beige Book could spark worries about a slowing recovery
- 20-year T-bond auction to yield near 1.35%Â
Pelosi says she is closing in on a deal with Mnuchin, while McConnell provides a possible opening — The prospects for a stimulus bill improved yesterday after Speaker Pelosi voiced optimism about reaching a deal with Treasury Secretary Mnuchin in coming days. Ms. Pelosi backed off her deadline of yesterday and said that a deal could still be pushed through Congress by November 3.
Meanwhile, Senate Majority Leader McConnell gave mixed signals on Tuesday. Mr. McConnell reportedly told Republican Senators privately that he has warned the White House not to make a deal with Speaker Pelosi because he believes Ms. Pelosi is not negotiating in good faith, according to reporting by the Washington Post.
In public comments, however, Mr. McConnell was a little more cooperative and said that if there is a Pelosi-Mnuchin bill that is fully supported by President Trump, he will bring it to the floor of the Senate, although he didn’t say that would happen before the election. He said, “If a presidentially supported bill clears the House, at some point we’ll bring it to the floor.” The bill would have to pass the Senate with mostly Democratic support since the majority of Republican Senators seem likely to vote against the bill.
Mr. McConnell is trying to keep his Republican caucus focused and united ahead of the election and does not want to get derailed by the stimulus bill. The Senate will vote today on a smaller $500 billion stimulus bill and will vote next Monday on Amy Coney Barrett as a new Supreme Court Justice.
Meanwhile, White House Chief of Staff Meadows said yesterday that the size of the latest Mnuchin offer is $1.88 trillion, slightly above the previous offer of $1.8 trillion but below Ms. Pelosi’s long-standing demand for $2.2 trillion. Mr. Meadows said yesterday, “I want to stress: We’re not just down to a difference of language and a few dollars. We still have a ways to go.”
Ms. Pelosi on Tuesday said the two major differences right now are state and local aid and the Covid liability shield. She said that she was waiting for new language on the liability issue from the White House.
The U.S. stock market on Tuesday rallied on the improved prospects for a stimulus deal. The S&P 500 index on Tuesday closed +0.47% while the Nasdaq 100 index closed +0.37%.
Fed’s Beige Book could spark worries about a slowing recovery — The markets will be watching the Fed’s Beige Book today to gauge how the recovery is faring. Fed officials remain worried about the sustainability of the recovery, considering that they have been pounding the table for weeks asking for another round of fiscal stimulus.
The Fed’s latest Beige Book report, released on September 2, said that, “Economic activity increased among most Districts, but gains were generally modest and activity remained well below levels prior to the COVID-19 pandemic. Manufacturing rose in most Districts, which coincided with increased activity at ports and among transportation and distribution firms. Consumer spending continued to pick up, sparked by strong vehicle sales and some improvements in tourism and retail sectors. But many Districts noted a slowing pace of growth in these areas, and total spending was still far below pre-pandemic levels.”
The markets are looking ahead to the next FOMC meeting on November 4-5, immediately after the November 3 election. The FOMC is not expected to make any major policy changes at its November meeting. The FOMC is not due to update their macroeconomic forecasts until the following meeting on December 15-16, which makes the December meeting more appropriate for any shifts in policy guidance.
The market is still not expecting an interest rate hike for at least the next two years. However, the federal funds futures curve in the past several weeks has tightened slightly by several basis points due to expectations for a big stimulus package in early 2021 that boosts the economy, if Democrats sweep Washington in the November 3 election.
Meanwhile, the Eurodollar futures curve, which trades out ten years, is currently discounting the Fed’s first +25 bp rate hike by late 2023 and an overall +125 bp rate hike by 2028.
20-year T-bond auction to yield near 1.35% — The Treasury today will sell $22 billion of 20-year T-bonds in the second and final reopening of the 1-1/8% 20-year bond of Aug 2040 that the Treasury first sold in August. The Treasury just started selling 20-year T-bonds again in May for the first time since 1986.
The benchmark 20-year T-bond late yesterday closed +5 bp at 1.35%, just 2 bp below the 4-1/2 month high of 1.37% posted on Oct 6.
The 5-auction averages for the 20-year T-bond are as follows: 2.45 bid cover ratio, $2 million in non-competitive bids, 5.8 bp tail to the median yield, 31.8 bp tail to the low yield, and 39% taken at the high yield. The 20-year T-bond is slightly below average in popularity among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of 62.5% of the last five 20-year T-bond auctions, which is slightly below the median of 63.8% for all recent Treasury coupon auctions.
