U.S. inflation expectations rise to 6-1/2 year high — The 10-year breakeven inflation expectations rate on Monday rose to a 6-1/2 year high of 2.216% and closed the day +0.8 bp at 2.206%. The breakeven rate is still well below the peak of 2.73% seen in 2012 when the Fed was flooding the economy with liquidity in the wake of the Great Recession, leading to fears of an inflation outbreak. However, that inflation outbreak never occurred, and the breakeven rate by 2016 sank below 1.50%.
Yesterday’s climb in the 10-year breakeven rate was sparked by the continued improvement in the U.S. pandemic statistics, which raised the possibility that the U.S. economy could overheat by next year, particularly given the Biden administration’s plans for another $1.9 trillion of stimulus.
Inflation expectations were also pushed higher by the rally in WTI crude oil prices on Monday to a 1-year high of $58.14. Since last November, oil prices have risen sharply due to the production restraint by OPEC+ and optimism about oil demand later this year if the pandemic fades as expected. There is a fairly close correlation between the 10-year breakeven inflation expectations rate and oil prices, as seen in the nearby chart.
The climb in inflation expectations has been a major bearish factor for 10-year T-note prices, along with the knowledge that the Treasury market is being forced to finance a massive amount of new debt caused by pandemic-rescue plans. The 10-year T-note yield yesterday climbed to an 11-month high of 1.198% and closed the day +0.7 bp at 1.171%. Meanwhile, the 30-year T-bond on Monday edged slightly above the psychological level of 2.00%, but then fell back and closed the day -1.8 bp at 1.953%.
Trump’s Senate trial begins today while House committees start voting on pandemic aid bill — Mr. Trump’s impeachment trial in the Senate begins today. The trial may be able to wrap up as soon as next Tuesday. The trial is not likely to have any market impact since Mr. Trump is no longer president and since the outcome is a forgone conclusion.
In an amendment vote two weeks ago, 45 of 50 Republican Senators already expressed the view the trial is unconstitutional since Mr. Trump is no longer in office, even though there is precedent to the contrary. Those 45 Republican Senators will presumably vote to acquit. That would make it virtually impossible to get votes for conviction from the 17 Republican Senators that would be necessary to get to the 67-vote conviction threshold, assuming that all 50 Democratic Senators vote to convict. The betting odds at PredictIt.com, for whatever they are worth, are currently at only 6% that Mr. Trump will be convicted.
Meanwhile, House committees today will start voting on the legislation that defines President Biden’s $1.9 trillion pandemic aid bill. House committees are scheduled to finalize the legislation by next Tuesday (Feb 16), allowing the full House to vote on the bill during the week of February 22. The bill would then go to the Senate for its approval by a majority vote. Democrats intend to pass the pandemic aid bill before expanded unemployment benefits expire in mid-March.
The House Education and Labor Committee could vote on its section of the bill as soon as today. The Financial Services Committee is scheduled to vote on its section of the bill on Wednesday. The House Ways and Means Committee on Wednesday will begin a multi-day process to consider the tax portions of the bill, according to Bloomberg. The Ways and Means Committee will be covering critical issues such as relief checks, paid-leave benefits, expanded family tax credits, and extended unemployment benefits.
Goldman Sachs on Monday raised its estimate of the final pandemic aid bill to $1.5 trillion from $1.1 trillion since the bill is being passed through budget reconciliation and does not need the support of any Republicans. Goldman apparently believes the $1.9 trillion bill will be whittled down to $1.5 trillion by factors such as tightening the eligibility for the $1,400 stimulus checks.
Dec U.S. JOLTS job openings expected to lose more ground — The consensus is for today’s Dec JOLTS job openings report to show a decline of -127,000 to 6.400 million, adding to November’s -105,000 decline to 6.527 million. Job openings improved sharply during the summer but have since stalled due to the late-2020 pandemic surge and the renewed weakness in the labor market. Job openings have recovered only about 60% of the plunge seen last spring when the U.S. economy was largely shut down due to the initial pandemic outbreak.
3-year T-note auction to yield near 0.19% — The Treasury today will sell $58 billion of 3-year T-notes. The Treasury will then continue this week’s $126 billion quarterly refunding operation by selling $41 billion of 10-year T-notes on Wed and $27 billion of 30-year T-bonds on Thursday.
The benchmark 3-year T-note yield late yesterday was trading at 0.19%, which is in the lower half of the range seen since last September. The 3-year T-note yield remains pinned at an extremely low level due to expectations that the Fed will leave its funds rate target unchanged until mid-2023.
The 12-auction averages for the 3-year are as follows: 2.41 bid cover ratio, $30 million in non-competitive bids, 3.2 bp tail to the median yield, 16.1 bp tail to the low yield, and 62% taken at the high yield. The 3-year is the least popular security among foreign investors and central banks. Indirect bidders have taken an average of only 51.5% of the last twelve 3-year T-note auctions, well below the median of 63.6% for all recent coupon auctions.
