The 3 yr note auction, very sensitive to expectations of Fed policy, was soft. The yield of 1.63% was above the when issued of around 1.625%. The bid to cover of 2.74 was below the one year average of 2.80. Also, dealers got stuck with 42% of the auction vs the previous 12 month average of 39%.
Bottom line, the highest yield in almost 7 years wasn’t enough to encourage buyers to bid aggressively for 3 yr paper. It of course comes a week before the next rate hike that seemed to come out of nowhere. After the March hike, the next press conference meeting is in June and the market expectation for a 2nd hike this year then is about 50%. The market fully expects another rate hike by the September press conference meeting and odds for a 3rd hike this year at the December one stands at about 50%. The Fed would love to raise rates 3 times this year and 3 times next year and 3 times in 2019 in order to get to their magic 3% target. Of course Janet won’t be driving the bus next year and there will be many other committee changes so the analysis past this year is truly meaningless.
While I have you, keep your eye on SPX level 2363 as its last Tuesday’s close, the day before the Trump speech that got everyone so excited about but then was diluted by weekend tweets. The Russell 2000 and Transportation index have already given back that rally. The DJIA is still 120 pts above and the NASDAQ is by 23 pts as of this writing.