Treasuries. What’s Going on Here?

After the good 2 yr note auction yesterday, the 5 yr auction today was more mixed to the soft side. The yield was above the when issued but the bid to cover was slightly above the previous 12 month average. Direct and indirect bidders took 63% of the auction vs the one year average of 68% and that is the least amount since July 2016 and thus left dealers with the most amount since then in any one 5 yr auction.

Bottom line, the action in US Treasuries is truly fascinating and if only we can make it talk. We keep talking about the differing messages all these markets are sending but it’s really glaring over the past few trading days since the French election. Yes, long end yields adjusted higher this week but with the 10 yr yield still only at 2.33-.34%, well below the upper end of the recent range of 2.60%, what is that telling us about the US economy and tax reform? The 2s/10s spread is only at 105 bps. It was at 100 bps the day of the election and thus we’ve essentially given back the entire 36 bps widening after Trump won. The spread peaked on December 22^nd. What is going on here? We can say that Treasury buyers are focused on the here and now of slow growth at the same time the Fed is hiking rates and this explains the flattening. As to what it thinks about tax reform, it obviously still has questions on the size and timing of its implementation. I’m assuming this gets done late summer but the size is of course in question.

10 year yield

2 year yield