A week before Quantitative Tightening will begin and with very much reduced expectations that the Fed will follow with a rate hike in December, the 3 yr note auction did not go that well. The yield of 1.433% was above the when issued of 1.425-1.43%. The bid to cover of 2.70 was below the one year average of 2.83. And, direct and indirect bidders took 57% of the auction which was slightly below the 12 month average of 61%.
Bottom line, it seems like we’ve stretched this interest rate rubber band too far on the downside for now leaving yields much less attractive in today’s auction. Certainly relief over the reduced damage expectations from Irma helped with that. Also and all else equal, Bill Dudley told everyone last week that he still expects more rate hikes and the bond market clearly hasn’t believed him. In fact, Brainard’s hesitancy has been more of what the market has attached itself to. Market participants have so clung to the recent drop in the inflation rate and think the Fed should stop everything without grasping that rates are still ridiculously low and raising rates just 3 times a year is a pathetically slow pace. I’ll repeat my belief that if the S&P 500 handles QT without a hitch and all else equal on the economy, the Fed will be hiking rates again in December. I’m not arguing that everything is copasetic with the US economy and can handle more tightening, I’m just trying to get into the mind of Fed officials and what they are focused on.