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Biden infrastructure talks shift to bipartisan group of Senators
10-year T-note yield dips to 1-month low ahead of today's auction
10-year T-note auction to yield near 1.53%

Biden infrastructure talks shift to bipartisan group of Senators — President Biden on Tuesday ended his negotiations with Republican Senator Capito and now plans to engage with a 20-member bipartisan group of Senators. That group plans to produce a proposal by the end of this week. Mr. Biden leaves today for a European trip, which is likely to slow negotiations.

Mr. Biden on Tuesday ended his talks with Senator Capito with a short phone call after she said her group of Republican Senators could not raise their spending package any farther or be more specific about pay-fors. They thanked each other for their time, but the two sides were too far apart for any further negotiations to be productive.

Mr. Biden is now pinning his hopes for a bipartisan deal on the bipartisan group of Senators that met on Tuesday night. President Biden seems willing to accept a bipartisan infrastructure spending plan if it is large enough and has acceptable pay-fors. However, Mr. Biden has already rejected user fees that would effectively be a new tax on people earning less than $400,000 per year. The White House said Mr. Biden has not agreed to the re-purposing of unused pandemic aid money.

A bipartisan infrastructure bill cannot get past the Senate filibuster unless there is support from at least 10 Republican Senators, which is a very tall order. Mr. Biden appears willing to pocket a bipartisan infrastructure bill if one emerges, but he will then move on to fit the rest of his $2.25 billion infrastructure bill into a Democrat-only bill that would passed by the Senate through the budget reconciliation process, thus bypassing the filibuster.

While the bipartisan infrastructure talks continue, House Speaker Pelosi is developing her own infrastructure bill behind the scenes, which she has said she intends to pass by the 4th of July if the bipartisan talks fail. To that end, the House Transportation and Infrastructure Committee today is expected to vote to approve the $547 billion transportation funding package that it unveiled last Friday. That package will likely be part of the larger Biden infrastructure bill.

Senate Majority Leader Schumer said yesterday that he thinks a proposal by the bipartisan group of Senators has a better chance of success than Senator Capito’s Republican offer. However, Mr. Schumer said that the Senate will pursue a Democratic reconciliation bill even if the bipartisan talks produce an infrastructure bill. Mr. Schumer said, “It may well be that part of the bill that will pass will be bipartisan and part of it will be through reconciliation, but we’re not going to sacrifice the bigness and boldness in this bill. We’ll just pursue two paths, and at some point they will join.”

10-year T-note yield dips to 1-month low ahead of today’s auction — The benchmark 10-year T-note yield yesterday fell to a 1-month low of 1.51% and closed the day down -4 bp at 1.53%. The 10-year T-note yield is now down by -24 bp from March’s 1-1/4 year high of 1.77%.

The 10-year T-note yield surged during the first quarter of this year due to the plunge in the pandemic statistics and the $1.9 trillion pandemic aid bill passed in March, which contained another round of stimulus checks. In the past two months, however, the 10-year T-note yield has traded sideways to slightly lower in a narrow range.

The T-note market has already discounted the sharp recovery in the U.S. economy and the current surge in inflation. The question now is whether the economy will remain strong through year-end and whether inflation will be persistent. The markets are also waiting to see when the Fed will begin its QE tapering. The market is not expecting the Fed to start raising interest rates until early 2023.

The Fed has telegraphed fairly clearly that it will begin its discussion of QE tapering at the FOMC meeting next Tuesday and Wednesday. However, the markets are not generally expecting an early warning of QE tapering until perhaps the Fed’s August Jackson Hole conference or the September 21-22 FOMC meeting.

A survey taken by Bloomberg in late April found that the largest percentage of respondents (45%) expect the Fed to provide an early warning of QE tapering in Q3 and then make a formal announcement in Q4. Only 14% of respondents expect an earlier formal announcement in Q3. A large contingent of respondents (40%) is not expecting the formal QE tapering announcement until sometime in 2022 or later.

10-year T-note auction to yield near 1.53% — The Treasury today will sell $38 billion of 10-year T-notes in the first of two reopenings of the 1-5/8% 10-year T-note of May 2031. The Treasury first sold that note in May. The Treasury will then conclude this week’s $120 billion coupon package by selling $24 billion of reopened 30-year T-bonds on Thursday.

The 12-auction averages for the 10-year are as follows: 2.40 bid cover ratio, $16 million in non-competitive bids, 5.0 bp tail to the median yield, 58.9 bp tail to the low yield, and 56% taken at the high yield. The 10-year is of average popularity among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of 60.5% of the last twelve 10-year T-note auctions, which exactly matches the median of 60.5% for all recent Treasury coupon auctions.

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