- FOMC meeting minutes expected to reiterate recent dovish themes
- 20-year T-bond auction
FOMC meeting minutes expected to reiterate recent dovish themes — The FOMC today will release the minutes from its last meeting on April 27-28. The markets after that meeting were reassured by Fed Chair Powell’s generally dovish comments and his continued insistence that QE tapering is “some time” away.
The FOMC’s post-meeting statement was upbeat about the economy and said, “amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened.” The FOMC said that “risks to the economic outlook remain,” but that was a less severe assessment than previous language mentioning “considerable risks.”
Despite the more upbeat economic outlook, Fed Chair Powell, at his post-meeting press conference, reiterated the Fed’s theme that the pickup in inflation was due to “transitory” factors and would not warrant an interest rate hike. He added that “it is not time yet” to start talking about tapering asset purchases.
Since the last FOMC meeting on April 27-28, there has been some worrisome inflation news. On a 3-month annualized basis, the headline CPI last Wednesday soared by +7.2%, and the core CPI was up by +5.6%. The current 10-year breakeven inflation expectations rate of 2.55% is only 4 bp below last Wednesday’s 8-year high of 2.59%.
Despite last Wednesday’s strong CPI report, most Fed officials have kept up their theme that the current inflation surge is transitory and will not lead to a rate hike. Fed Vice Chair Clarida said Monday that the weaker-than-expected April payroll report shows “we have not made substantial further progress” on the Fed’s goals for employment to begin to start talking of tapering monthly bond purchases.
Also, Atlanta Fed President Bostic said Monday that, “we are still 8 million jobs short of where we were pre-pandemic, and until we make substantial progress to close that gap, I think we have got to have our policies in a very strongly accommodative stance.”
However, at least one hawkish Fed official has not been silenced by the weak April payroll report of +266,000. Dallas Fed President Kaplan said last Friday that he is worried about excess imbalances, especially in the housing market. He said the Fed should discuss tapering its QE program “sooner rather than later.”
The Fed in the past week has generally been successful in soothing market sentiment after last Wednesday’s alarming CPI report. The stock market sold off sharply last Wednesday on the CPI report but has since regained about one-third of the losses seen early last week. The current 10-year T-note yield of 1.64% is just 2 bp higher than the 1.62% level seen last Tuesday before the alarming CPI report.
The federal funds futures curve for the 2021 and 2022 contracts has seen little net movement from the level just before last Wednesday’s CPI report. However, the 2023 federal funds futures contracts have tightened slightly by about 2 bp since last Wednesday’s CPI report.
The markets still generally believe the Fed when it says that now is not the time to discuss tapering QE and that a rate hike is a long way away. A survey taken by Bloomberg several weeks ago found that 14% of the analysts surveyed expect the Fed to start tapering its QE program in Q3, and 45% of the analysts expect tapering to begin in Q4. Opportunities for the Fed to announce the tapering could come as soon as the July or September FOMC meetings or at the Fed’s late-August Jackson Hole conference. The consensus is for the tapering to last 7-12 months.
The markets are not expecting the Fed to start raising rates until early 2023. The Bloomberg survey taken several weeks ago found a consensus for two +25 bp rate hikes in 2023, which would bring the funds rate target up to 0.50%/0.75% from the current level of 0%-0.25%. The Eurodollar futures curve is indicating market expectations for the Fed’s first rate hike by early 2023.
20-year T-bond auction — The Treasury today will sell $27 billion of new 20-year T-bonds. The Treasury just started selling the 20-year T-bond again in May 2020 for the first time since 1986. The Treasury has been following a schedule of selling a new 20-year T-bond in February, May, August, and November, and then following that up with two reopenings in the following two months. The $27 billion size of today’s new 20-year T-bond auction is unchanged from the last two comparable auctions in November and February.
The benchmark 20-year T-bond yield yesterday closed at 2.27%, roughly near the middle of the range seen since mid-March. The 20-year yield is currently 15 bp below the cyclical high of 2.42% posted in mid-March.
The 12-auction averages for the 20-year are as follows: 2.39 bid cover ratio, $3 million in non-competitive bids, 5.8 bp tail to the median yield, 104 bp tail to the low yield, and 48% taken at the high yield. The 20-year T-bond is of average popularity among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of 60.6% of the last twelve 20-year T-bond auctions, which is very close to the median of 60.7% for all recent Treasury coupon auctions.
