Heavy Treasury Issuance and a Less Hawkish Fed
Prior Week Summary
It was a relatively light week for economic data and flows were largely driven by a heavy debt issuance calendar. The market absorbed $258 billion of Treasuries last week, the largest amount of paper ever auctioned in such a short time relatively well. Indeed, rates increased on the front and very long-end of the curve, while the belly of the curve fell. The yield spread reflected a 9 bps compression in owning the 10-year Treasury note, financed with equal notional of 2-year notes and 30-year bonds, highlighting the relatively strong yield curve twist that took place last week.
The large amount of supply to hit the market has helped push the spread between LIBOR and OIS to nearly 40 basis points at the 3 month point, which puts the spread roughly in the 80th percentile of weekly data points over the last decade. In a similar context, several market commentators pointed out last week that short positioning in Treasury notes via the futures market is now at its most elevated point in the history of the data series. These data points certainly seem worth mentioning in our high level weekly commentary, as market sentiment and investor flows appear to be relatively one sided currently.
On the economic data front, the FOMC meeting minutes were interpreted to be less hawkish than the market had anticipated, stating that “Participants expected that with further gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace and labor market conditions would remain strong.”
The Look Forward
The data calendar is back in play with a number of Tier 1 data releases expected this week, including the February ISM manufacturing survey, consumer confidence, and the personal income and spending report. The market is also likely to focus on Chairman Powell’s first major speech to the House Financial Services Committee tomorrow.
Sources: Bloomberg Finance L.P., (Treasuries) Chatham Financial (Swap Curves), FHLB Boston, Chicago, Dallas, Des Moines for FHLB Advance Rates. Wells Fargo Brokered CD Indications.
Market Implied Policy Path (Overnight Indexed Swap Rates)
Source: Chatham Financial
Fixed Income Snapshot
Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit http://www.chathamfinancial.com/legal-notices/.
Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions.