The Federal Reserve did it again, giving back to the markets at a time when it wasn’t expected, and showing once again that the early months of a new Fed chair’s tenure are fraught ones, in terms of interpreting monetary policy.
Janet Yellen probably didn’t mean to suggest rate hikes could come as soon as six months after the bond-buying program ends for good. And the release of the Fed minutes also demonstrated that the Fed – even in discussing projections – worried about how it would all look, specifically the “dot matrix” that showed several Fed members saw higher rates before long, and really, that it was all just kind of overstated. (Yellen even said this at her press conference – that the dots did not mean what you thought they meant).
Either way, that’s wreaked some havoc on expectations for policy, with the market shifting back towards thinking this is all going to come down a bit later than expected. This comes just after the most recent Reuters primary dealers’ poll that suggested major strategists were finally getting comfortable with the idea of possible rate hikes in the first half of 2015 rather than later – there were 8 who saw that happening out of 18, compared with just 4 in the previous poll. CME Fedwatch data shows now the chances of a rate increase before July at 42 percent, down from 52 percent on Tuesday.
“The latest round of minutes highlighted a Fed that in the interest of being ever-more transparent really continues to muddy the waters even more,” wrote Tom Porcelli, fixed income strategist at RBC. But honestly? Early in a Fed chair’s run, that’s just not unusual, and difficult for the market to take after spending several years getting used to someone’s tendencies.
So that happened. Really, on some level we’re still talking about developments scheduled to take place more than a year from now, and markets can only discount so much.
Either way, it helped unwind some of the selling that the market had seen in the short end of the curve, steepening the curve once again and reducing some concern about the front end and the effects of the higher short-term rates and the flattening of the yield curve. It also sparked some life in the biotech and other momentum names as well, though for how long is another question.
Markets will keep an eye on the 30-year bond sale later today, the last of three auctions in the quarterly refunding. Lately, Treasury auctions have been a complete wild card, with bidding by direct bidders – those who aren’t going through the 22 primary dealers in Treasury securities who directly deal with the Treasury and New York Federal Reserve – all over the map.
Direct bidding was high in some recent auctions, especially in the three-year auction on Tuesday, and then fell off again on Wednesday. Coupled with the recent spike in bank buys of five- and seven-year paper, there are a lot of questions around the dynamics in the Treasury market right now.
We’ll be looking at this phenomena later in the day and the market gets the third of its three auctions this week, the 30-year bond sale that shapes up to be relatively attractive given the release of Fed minutes that showed the Fed’s whole deal about being more aggressive in rate cuts? Never mind all that stuff or what not, we’re going at the same pace that we’d been going.
Concern over what was to happen with the Fed minutes (just one hour after the auction) may have kept buyers cooling their heels with the 10-year note sale on Wednesday. Still, much remains unclear about activity in the Treasury market where long-dated yields remain at relatively attractive levels and the short end saw yields drop to their lowest in weeks as prices rallied after the Fed minutes.