A White House in Turmoil, The Fed Shifting Policy: Treasuries Are Actually Calm About It
by Daniel Kruger
For all the turmoil roiling Washington, D.C. from the Federal Reserve to the White House, and Treasury bonds, typically a go-to segment of the financial markets when you’re looking for a pessimistic take on the day’s affairs, appear unusually placid.
When 2016 closed the Trump Trade, along with expectations that inflation and bond yields would be rising ever higher, were in full swing. Foreign demand at December’s Treasury auctions plunged almost in half to the lowest for any month at least since the government established its current schedule of auctions in 2009, helping push benchmark 10-year yields to 2.6 percent, their highest since 2014.
What a difference 2017 has made. Foreign demand at 17 percent of the $1.15 trillion auctioned through June is back in-line with post-2012 levels and investment funds have snapped up 47.5 percent of the securities, a record portion, according to the latest auction allotment report, which tracks the sales through June. Buying by those key groups has helped pull the 10-year yield down to 2.25 percent. That’s roughly where it was at the end of 2015, just before the Federal Reserve upended investor speculation that it would begin raising interest rates as it waited out a rash of concerns ranging from China’s weakening currency to the Brexit vote.
“International investors still have dollars to invest,” and have come to the conclusion that the economy has been little changed by “the disorganization in Washington,” said Marc Fovinci, who manages bond portfolios at Ferguson Wellman Capital Management. “We’re still in the same economic environment: not too hot and not too cold,”
Even with the Fed releasing its July statement in the middle of the government’s $88 billion auction calendar this week, there are many reasons to expect the bond market to remain becalmed. The auctions will be supported by investors receiving $79.2 billion in proceeds from maturing debt, leaving the Treasury to raise just $8.8 billion of new cash. And Barclay’s economists Michael Gapen and Bierina Uruci in a note published yesterday argue that the Fed is unlikely to “rock the boat” by announcing a change in its approach to reducing the size of its balance sheet without having prepared markets for that outcome.
The chances that Republicans will succeed in repealing and possibly replacing the 2010 Affordable Care Act, also known as Obamacare, remain unclear. At the same time, promises of stimulative fiscal policies from President Trump exist largely on his drawing board rather than in legislative proposals, while investigations into the extent of his campaign’s involvement with Russia by various Congressional committees as well as special counsel Robert Mueller drag forward. Despite concerns about stock market valuations, fundamentals remain strong in the credit markets even at low yields. The message bond investors have taken away from current conditions is that threats to the status quo are stuck on pause.
“There’s nothing me keeping me up at night,” Fovinci said. “It’s exciting that there’s nothing exciting.”