The Treasury market is trading lower this morning as the market must absorb yet another record auction, deal with a stronger dollar, as well as the Minutes from the last FOMC meeting. Scattered among these things is a fairly “lively” economic calendar, but not necessarily one that will drive bond prices up and down. In fact, there aren’t many things that drive bond prices up and down these days except economic indicators tied to inflation, then it’s the Employment Report, then it’s just gossip and hearsay. While 3% didn’t put up much of a fight, pushing back below 3% will likely take an event of sorts or a big move towards dollar-denominated assets, which isn’t out of the realm of possibilities. The continued strength of the greenback is helpful when attracting foreign assets when currency hedging must be applied. As an absolute yield, the U.S. Treasury is optically a great global bargain, when you add back the hedging aspect of this; well, all I can say is that it is getting better. Now that the trade war with China is on hold, investors may find a new attractiveness to dollar debt like that in the U.S. Tomorrow we will likely find that out when the Treasury auctions $33 billion 2-year notes, then follows that up on Wednesday with $36 billion 5-year notes, then completes the refunding with the sale of $30 billion 7-year notes. On top of that, we will have an early close on Friday to observe the Memorial Day weekend. So we know that a temporary stop of a trade war with China is good for stocks, but what does it mean for bonds? Mostly negative if assets move from a risk-off position to a risk-on one, which is happening as we speak, but a stronger dollar, further ignited by the trade announcement, could push investors back into bonds because they represent a yield value not seen in at least seven years. While there are a number of Fed officials taking to the podium this week, the market will be keeping an eye on the Minutes from the May 2nd meeting, even though we know that they didn’t act to raise rates. The one thing that the Minutes may reveal is where the Fed may be going. The drumbeat for as many as four rate hikes in 2018 is getting louder, so any view into the “tea leaves” might spur on new buying or continued selling.
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