DAILY MARKET COMMENTARY
March 10, 2014
If you simply look at the closing levels on the market you’d think that not much happened today. On bonds, you would be right. Bond prices were pretty stable all day. However, equities had a wilder ride. At one point the Dow was lower by -118 points only to see late short-covering/bottom-fishing take the Dow to a point where it was down only -34 points at the close. This is about what it managed to gain on Friday. Net, net a push.
The 2-year closed the session at 0.37%, the 5-year at 1.62%, and the 10-year at 2.78%; basically unchanged on the day.
Tomorrow brings the 3-year note. Last month the 3-year had an auction award of 0.715% which was right at the 6-month auction average of 0.721%. If the sale were held this afternoon the yield would be something more like 0.80%, above the average and probably enough to make the auction attractive. Last month’s 3-year sale was held on the day of Yellen’s testimony and right after the House passed a clean debt ceiling extension. Tomorrow’s sale will not have the same sort of fireworks in the background (unless Mr. Putin has a surprise for us).
Bonds are basically flat to start the new week. The 2-year is opening at 0.35%, the 5-year is 1.64%, and the 10-year is 2.79%.
Last week saw the yield on the 10-year move from its recent low of 2.59% at the beginning of the week to 2.82% on Friday morning when non-farm payrolls surprised to the upside. This week brings the next round of Treasury supply with a 3-year auction tomorrow, a 10-year on Wednesday, and a 30-year sale on Thursday. After last week’s uptick in rates, these auctions should produce some interest among investors. Recall that the last batch of auctions at the end of February drew an enthusiastic bid from foreign buyers. If anything, the Dollar is lower than it was at the time of those sales which makes our paper look even better.
There is some talk from Jon Hilsenrath, the Wall Street Journal’s link to the Fed’s thought process, that the Fed is contemplating a new exit strategy. Ever since the Fed flooded the system with reserves, market analysts have been worried how the Fed was going to withdraw those same reserves without sending interest rates through the roof. Given that the Fed has historically managed the level of rates by adjusting the supply of money, the new regime would have the Fed trying to manage the cost of money. (I’m not exactly sure why the Fed believes it can determine the cost of money better than the market can. This is what happens when a bunch of economists are nominated to the FOMC.) Attendant to this strategy would be the Fed continuing to pay interest on excess reserves for the foreseeable future. And those excess reserves would continue to slosh around in the system. Maybe we’ll hear more about this at the time of the upcoming FOMC meeting which takes place March 18-19, followed by a Yellen press conference at the conclusion of the meeting.
This week is a bit on the lean side for economic reports. Retail sales for February will be released Wednesday (forecast is for a gain of +0.2%), but that’s about it. The auctions will probably be the focus. Even Fed officials will be less visible as they enter a blackout period tomorrow in advance of the FOMC meeting. Philly Fed President Plosser spoke today and he warned other Fed officials about the risk of loose monetary policy. (I concur.)
Equities rallied again last week. They closed out with small gains on Friday. Indications are that Friday's gains will be reversed when trading gets going today.
Director of Investment Sales
Jeff's comments and insights, based on his professional expertise and the knowledge he has acquired observing the U.S. economy and global markets, are offered as his own personal observations and opinions, and not necessarily reflective of those held by SunCorp, our board or member credit unions. Please do not respond to this message as this e-mail address is un-monitored.
MONTHLY MARKET COMMENTARY
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