- Fed seems to begin PR campaign of warning of QE taperingÂ
- Time is running short for bipartisan infrastructure bill as Schumer says Senate will work on the bill in July
- 5-year T-note auction to yield near 0.77%
Fed seems to begin PR campaign of warning of QE tapering — Fed Vice Chair Clarida yesterday said, “It may well be,” that “in upcoming meetings, we’ll be at the point where we can begin to discuss scaling back the pace of asset purchases.” He added, “I think it’s going to depend on the flow of data that we get.”
Up until yesterday, the only Fed officials that were actively promoting the start of QE tapering discussions were Dallas Fed President Kaplan and, more recently, Philadelphia Fed President Harker. The fact that the Fed’s Vice Chairman has now begun to warn about QE tapering is an important development since it appears to be the beginning of a planned Fed PR campaign.
The Fed wants to gently prepare the markets for QE tapering so that the markets do not display another taper tantrum such as the one seen back in 2013 when the markets were caught off-guard by then-Fed Chair Bernanke’s mention of QE tapering.
The markets last Wednesday were surprised to hear from the April 27-28 FOMC meeting minutes that “a number” of FOMC members suggested that discussions might have to begin at some point on QE tapering. That suggested that the talks about QE tapering could begin as soon as the next FOMC meeting on June 15-16 or certainly by the following meeting on July 27-28.
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 at the July or September FOMC meetings or at the Fed’s late-August Jackson Hole conference.
The markets are still not expecting the Fed’s first rate hike until early 2023, according to the federal funds futures market and the 3-month Eurodollar futures market.
Time is running short for bipartisan infrastructure bill as Schumer says Senate will work on the bill in July — Time is running short for a bipartisan infrastructure bill after Senate Majority Leader Schumer said that the Senate will work on an infrastructure billion in July, whether that bill is a bipartisan bill or a Democratic bill that is being pushed through with budget reconciliation.
Meanwhile, the group of Republican Senators led by Senator Capito plans to present the White House with a new infrastructure proposal on Thursday of about $1 trillion over eight years. However, that bill is not all new money and includes spending that has already been planned. In addition, there are still doubts about whether Republicans have pay-fors to account for all the spending since tax increases are off the table.
There is less than a week left until President Biden’s informal deadline of Memorial Day for bipartisan talks to show progress. Mr. Biden might be willing to carry on talks for another week or two past the deadline. However, the two sides remain very far apart and there is little chance of success.
Mr. Biden is likely to soon give House Speaker Pelosi the go-ahead to pass a Democratic infrastructure bill in the House. Ms. Pelosi has set an informal deadline of the 4th of July for the House to pass the infrastructure bill. That would dovetail with Senate Schumer’s comment yesterday that the Senate will be working the infrastructure bill in July.
5-year T-note auction to yield near 0.77% — The Treasury today will sell $26 billion of 2-year floating-rate notes and $61 billion of 5-year T-notes. The Treasury will then conclude this week’s $209 billion T-note package by selling $62 billion of 7-year T-notes on Thursday.
The good news is that there was a strong investor reception for yesterday’s 2-year T-note auction. Yesterday’s 2-year auction saw a bid-to-cover ratio of 2.74, well above the 12-auction average of 2.52 and the highest in 9 months.
The benchmark 5-year T-note yield yesterday fell -3 bp to a 2-week low of 0.77% as various Fed officials kept up their drumbeat of encouraging the markets not to worry about the current inflation surge. The 5-year T-note yield is in the lower third of the narrow range seen in the past three months.
The 12-auction averages for the 5-year are as follows: 2.40 bid cover ratio, $23 million in non-competitive bids, 4.7 bp tail to the median yield, 12.9 bp tail to the low yield, and 47% taken at the high yield. The 5-year is mildly below average in popularity among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of 59.6% of the last twelve 5-year T-note auctions, which is mildly below the median of 60.5% for all recent Treasury coupon auctions.
