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Yields Spike on Weak Demand for Treasuries and Powell Remarks – Moody’s Cuts US Debt Outlook to Negative

The 10-year treasury market started the week strong after last week’s big rally. The treasury held auctions of 3- and 10-year treasury notes that showed strong demand, especially considering the volume was larger than last month’s auctions. The 10-Year was sitting at 4.50% Thursday morning (down over 50 bps from the recent high). Then came Thursday’s $24 billion treasury auction of 30-year bonds. It did not go well. Primary dealers (money center banks) stepped in to purchase 25% of the issuance- meaning there weren’t enough bids from the market to clear all the bonds. The auction also was disrupted by a hacking/ransomware attack at the Industrial and Commerce Bank of China’s US Division. This was followed by Fed Chair Powell’s remarks: Fed officials are “not confident” rates are high enough to finish the battle with inflation and that the inflation battle “has a long way to go.” Perhaps he is being overly hawkish after last week’s drop in yields after the Fed meeting as he worries about overconfidence. The 10-Year Treasury spiked to 4.63% in hours and now sits at 4.65%.

Moody’s has cut the US Credit Rating Outlook from “stable” to “negative – citing polarization in Washington as driving large deficits (note that the government is 7 days away from a shutdown unless an emergency bill is passed).  Moody’s did affirm the US’s top rating of Aaa. If Congress and the White House can’t help, who can? Will the Fed be forced back into Quantitative Easing (buying Treasuries)? Stay tuned…

By David R. Pascale, Jr., Senior Vice President at George Smith Partners