The Daily Update – Fed, UST Auctions

Last night’s FOMC statement was a “mark-to-market” of sorts that did not give any clear indications about future policy. Since the FOMC last met, inflation has risen on a 12 month basis due to base effects and first quarter GDP showed that the pace of growth had moderated relative to the previous quarter. This has led to slight changes in the statement regarding the categorisation of growth and inflation, including a removal of a previous phrase that noted the Fed would monitor inflation developments closely.

More of interest to the market was the Treasury refunding announcement where the schedule of issuance was less than the market had expected giving the rather battered Treasury market a respite with the short end managing a small rally ahead of the FOMC statement. The Treasury actually increased the supply of coupon notes and bonds, however, by a lot less than the market had been expecting; they also said in their statement that they expect aggregate bill supply to decrease modestly into the fiscal year end in September and committed to a new 2-month bill benchmark. We would expect the first auction for that to be sometime in Q4 (a 2-month maturity would be a nice add at the November refunding as the new bills would just cross year-end). Another surprise was the lack of increase in the issuance of Treasury Inflation Protected Securities (TIPS) with some speculation that they may be planning a new 5 year TIPS later in the year.

As said above a respite for the market ahead of today’s durable goods, trade, factory orders and PMI data and tomorrow’s very important non-farm payrolls data with the market expecting a +192k headline number and just a 0.2% increase in average hourly earnings month on month.

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