One holiday shortened work week behind us and another just beginning....not much has changed as fixed income investors are still being held hostage by the magnitude of US debt financing operations and the overhanging threat of a potential US credit ratings cut (sorry UK). At 1 pm today the Treasury Department will initiate leg 1 of the 3 scheduled government debt issuances (totaling $101bn when all is said and done) this week. The Treasury will open the process by offering $40bn 2 yr TSY notes. Here is a preview of the 1pm 2 yr note auction....
The issuance amount is unchanged from April auction...but still a record $40bn for 2 yr notes. Indirect bidders have had strong interest in the 2 yr note in the past five auctions with the April issuance receiving 28.7% of their bids from indirect participants while the March auction saw a record 53% indirect participation. The average bid to cover ratio, a measure of investor demand, has been 2.58 over the past five auctions. Today's 2 yr note auction will require overseas demand to match the March auction number (not match but needs to be considerably higher than April auction) or today's issuance may not go well (tail)...
Here is a deeper look into recent 2 yr note auction results....
Adding to the bearish bond bias is the fickle feeling (mainstream media's fault) that the economic crisis is turning the corner towards recovery.This morning that outlook was augmented by Consumer Confidence data. "The Conference Board Consumer Confidence IndexTM, which had improved considerably in April, posted another large gain in May. The Index now stands at 54.9 (1985=100), up from 40.8 in April. The Present Situation Index increased to 28.9 from 25.5 last month. The Expectations Index rose to 72.3 from 51.0 in April."
Says Lynn Franco, Director of The Conference Board Consumer Research Center:
"After two months of significant improvements, the Consumer Confidence Index is now at its highest level in eight months (Sept. 2008, 61.4). Continued gains in the Present Situation Index indicate that current conditions have moderately improved, and growth in the second quarter is likely to be less negative than in the first. Looking ahead, consumers are considerably less pessimistic than they were earlier this year, and expectations are that business conditions, the labor market and incomes will improve in the coming months. While confidence is still weak by historical standards, as far as consumers are concerned, the worst is now behind us.
I don't intend to present a slanted/negative perception...but will be sure to remind all of the tone pouring out of the Federal Reserve . Remember the FOMC minutes that were released last week?
The committee downgraded their outlook for economic growth and employment in 2010 and 2010...adding that "Participants shared the judgment that their projections of future economic activity and unemployment continued to be subject to greater-than-average uncertainty" and "Although the near-term economic outlook had improved modestly since March, participants emphasized the tentative nature of the incoming data, which are volatile and subject to revision."
It's hard for us to complain about the perception of improved economic conditions...as consumer psychology and behavior are in need of multiple band-aids....but these "warm and fuzzy" feelings come at a time when the fixed income sector is incredibly defensive...so we would have preferred a slightly weaker read from consumers. (I think we are spoiled by Fed intervention).
The better than expected consumer confidence reading is indeed the culprit you should be releasing your rate sheet aggravation onto this morning... the 10 AM data release pushed the Dow up almost 100 points (8298 to 8393) while the 10 yr TSY note yield went from 3.41% to 3.44%....
...consequently putting selling pressure on MBS (which still outperformed TSYs).The previous early session price support (floor) of 99-13 is now acting as overhead resistance....
2 yr yield: 0.921%
10 yr yield: 3.489%
DOW: +206 to 8483
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