The 2 year/10 year Treasury yields are “back to normal”, but rates continue to rise. Some technical aspects are pushing yields up: new auctions in 10 and 30 year Treasuries are set for this week and a huge debt sale by Amazon.
Treasuries: Markets were prepared and had priced in a hawkish, tightening Federal Reserve. Tightening was assumed to be a series of interest rate hikes up to the “Neutral Rate” of about 2.50%; while keeping the balance sheet steady with the intent of rolling off maturing securities in the coming year. Recent Fed speeches and meeting minutes have significantly raised the bar on the level of tightening being planned. A half point increase at the May 3-4 Fed meeting is now the default scenario (futures are at 79% probability). Treasury yields are spiking as the market prices in hawkish new revelations from the Fed:
- Possible “overshooting” the neutral rate, ie. raising rates about 2.50% to about 3.50% putting the Fed Funds rate into “constraining” territory for the first time in decades
- “Quantitative Tightening” (QT, the opposite of QE) – QT will involve shrinking the Fed’s balance sheet at a rate of $95 billion per month ($60 billion in Treasuries, $35 billion in MBS).
The last period balance sheet reduction (2017-2019) averaged about $30 billion/per month and was mostly “runoff” of maturing treasuries. This round is expected to include outright sales of longer term treasuries starting this summer. Why so sudden? Maybe it’s “buyer’s remorse” or an attempt to “turn back the clock” as the Fed is being highly criticized for continuing to purchase bonds throughout 2021 and into March 2022.
Tomorrow’s CPI report is expected to indicate very high price increases as the effects of the Ukraine conflict are in the report’s scope. Interesting news regarding the Amazon debt sale: Amazon is pricing a 40 year fixed rate bond at 130 over Treasuries. Will other corporations rush to sell bonds before yields spike further? Tomorrow’s March CPI report is expected to be very high as the effects of the Ukraine conflict exacerbated already escalating prices. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners