Fixed Income Market Commentary by Kevin Giddis

July 25, 2017

The Treasury market is trading lower this morning as traders prepare for more supply and the FOMC meeting. Today the Treasury will auction $26.0 billion of 2-year notes, following that up with $34.0 billion 5-years tomorrow and closing it out with the sale of $28.0 billion of 7-year notes on Thursday. One might think that the Treasury market is “making room” for the “new stuff” by pushing the “old stuff” out at discounted prices. There are also a few sell trades happening in front of tomorrow’s FOMC in which almost every economist expects the Fed not to raise rates. The reason to tune in is all about whether the FOMC will offer some insight as to its balance sheet or to recognize that inflation, or the lack thereof, is on their mind, but they don’t have a clue as to how to make it go up! I am not trying to be critical of the Fed, because usually when you throw so much money at a problem, the causal effect is usually growth followed by higher prices. They have done that, and all they “got” was a $4.5 trillion dollar balance sheet, in lieu of a t-shirt that says “I bought every bond in a crisis and all I got was this stinking t-shirt.” Well, you get the point. So today is about the auction. Why? Because in absence of that, the next most important piece of data for trading is the Richmond Fed Manufacturing Index, which is expected to come in at 7.0 in July, the same as it was in June. How can that be? Moving along. Besides watching the 2-year note auction and the upcoming FOMC meeting, we are keeping an eye on North Korea, China, and…of course Washington. The Senate is supposed to begin the debate on repealing the ACA today, which could provide for some interesting theater, but not likely much more than that. The GOP, with a majority, can’t even get their own to engage completely on the issue, so I can’t imagine this goes very far. I think what the market wants to see is more debate about tax reform and deregulation…I am just saying. Maybe we get there before the year is out, maybe we won’t. But as long as we stay in this low vol pattern of activity, the bond market is content sitting around talking about the weather. Me? I am just happy I got to the bottom of the page!

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