The Daily Update - Fed Minutes

USTs rallied last night with the shorter dated 5-year most noticeably leading the move; which resulted in a slight steepening of the yield curve. This happened even though there was a $36bn issuance of a new 5-year benchmark bond auction which went ‘ok’ compared to recent deals. The move at the shorter end came after the May 2nd FOMC minutes were released with little change in guidance for the second half of the year in regard to further hikes, but a further hike, in June, was left on the table. The rally in rates was across the curve with the 5-year dropping 7.4bps and the 10-year fell 6.6bps into the US close.

For those that have an interest in the technical workings of the central bank, it appears that a large part of the meeting was spent discussing changes required to the operations around the Fed Funds rate. The Interest Rate on Excess Reserves (IOER) is utilised daily to keep the rate in the middle of the target band but is currently trading at a level 5bps too high. This may seem like a small matter but in the world of central bank management this is major. Put it this way, it is similar to trying to park your car in a 100 foot space and still managing to hit the car in front; very poor driving. In central bank terms missing a 25bps Funds spread constantly could erode confidence in their ability to manage reserves and hence was discussed at a board level. The result of this discussion is not clear but seemed to point towards only raising the IOER by 20bps when the next 25bps Funds hike is announced.

The committee also discussed the shape of the yield curve, but opinions appear divided on the value of the curve as a recessionary indicator. We now look out for further comments from the members and the next Fed meeting which is just around the corner on 13th June.

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