Liquidity continues to suffer today, in what is usually the busiest and the most efficient week of the month for Treasury trading. Volume remains muted following April payrolls, following the pattern after the FOMC meeting in the middle of the week. The 7-yr started the day as the cheapest point on the intermediate UST curve, but 10s are trying to squeeze into that role. As explained in the first article, the steeper 3s/10s curve is one result of the concern about perma-inflation that lingers through the rest of the decade. FHN Financial’s updated economic and rate forecast disagrees with that particular inflation theme despite today’s revisions to incorporate faster US inflation this summer. Economic Weekly will publish shortly.
Wednesday did not feature a more hawkish Fed outlook and even brought some good news in the form of larger reductions in Treasury auctions than expected. There was no reaction to the Treasury news at all, and the bump in bond prices after the FOMC was gone early the next morning. Still, the workings of quantitative tightening as the Fed’s balance sheet shrinks and the underlying dynamics of Treasury debt management will play a major part in how the Fed’s rate hikes are transmitted throughout the domestic economy.
Then, a final look back at the poor performance of financial assets, here and abroad, in April. The losses continued this week.Current bids: 10s at 3.117%, 5s at 3.040%, and 30s at 3.208%.