After a solid 2 yr note auction yesterday, the 5 yr auction today was soft. The yield of 1.828% was above the when issued of near 1.82%. The bid to cover of 2.33 was below the 12 month average of 2.43. The one positive was that dealers got left with 26% of the auction vs the one year average of 32%, leaving the balance with direct and indirect bidders.
Bottom line, today’s auction comes in the middle of a messy day in bonds, as stated earlier. The 6 bps rise in the 5 yr yield is the biggest one day move in 2 ½ months. I’ll say what I said this morning, the bull case on bonds is easy: lower inflation and modest growth and the Fed hiking short rates. The bear case is harder to imagine or quantify and that is the end of the European bond market bubble because of a reversal of ECB policy and the implications that has for yields everywhere as we are all in the same bond and market driven interest rate bed together.
I still believe the yields touched in July 2016 after Brexit will not be seen again in our lifetimes.
Yellen is speaking now in a Q&A, not a prepared speech and I think I’m about to fall asleep. It is a quantitative discussion on their models and economic theory. As of yet, she is saying nothing about current trends and interest rate/balance sheet intentions.