Tame CPI Data and Well Bid Treasury Auction Calm Inflation Worries, For Now

Today’s “routine” Treasury auction attracted a huge amount of attention as markets are focusing on potential inflation and rising rates. The recent increase in Treasury yields (0.90% to 1.50% since Jan 20) has unnerved markets in our highly levered economy. The specter of inflated assets being “marked to market” in a higher rate environment has fostered recent market volatility. Investors are hypersensitive to signs of inflation. Today’s passing of the $1.9 trillion stimulus package, recent gains in oil prices, and anticipated unleashing of pent up consumer demand are both harbingers of economic growth but also potential warning signs. Today’s CPI report indicated a 0.4% increase for February with an annual increase of 1.7%. These figures were in line with expectations (note that the February Personal Consumption Expenditures, the Fed’s preferred inflation index, will be announced on March 26). Todays closely watched 10 year Treasury auction went well. With more than adequate demand, the 10 year settled at 1.52% (this was significant as it helped alleviate market concerns that the increasing issuance of Treasuries is not sustainable). A poorly subscribed auction could have triggered a massive sell off, sending yields up towards 2.00%. Stock markets rallied with the Dow index up over 450 points or about 1.5%. (It’s interesting to note that an equity position in the Dow index would yield 1.5% in 8 hours of trading today and that yield would take 10 years to achieve in the bond market!) Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith