The 2 yr note auction was very good. The yield of 1.395% was below the when issued of about 1.40%. The bid to cover of 3.06 was well above the 12 month average of 2.73 and was the most since an auction in November 2015. Also reflecting solid demand, direct and indirect bidders took about 75% of the auction leaving dealers with only 25%, well below the one year average of 41%.
Bottom line, a solid 2 yr note auction is telling in two ways. One, it of course reflects very little belief that the Fed is going to be raising rates anytime soon. A full rate hike of another 25 bps is not priced in until June 2018. Second, the belief that the key reasons the Fed is not going to raise rates anytime soon is predicated on modest economic growth and inflation that is running below the 2% obsession. The Fed still though will begin QT in September and if they are really focused on easy financial conditions, as Bill Dudley has repeatedly talked about, and valuations (approaching year 2000 on some metrics) well they just might raise rates again in December and surprise us all with being more hawkish for once. Here is a chart of Bloomberg’s Financial Conditions Index. The higher it goes, the easier the environment. If it breaks above the July 2014 peak, go back to May 2007 the last time it was higher.
FINANCIAL CONDITIONS INDEX