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2 Year Paper Prices At Highest Yield Since May 2011; Directs Tumble, Dealers Surge
The most notable fact about today's $29 billion auction of 2 Year Notes was that the final yield of 0.544%, which stopped through the 0.546% When Issued, is that this was the highest auction yield since May of 2011 when the paper, since matured, priced at 0.56%. Considering some at the Fed anticipate the Fed Funds rate hitting over 4% by the time this bond is supposed to mature, either the Fed hawks or the market is wrong.
The other notable findings in today's auction: the Bid to Cover dipped modestly from 3.231% to 3.220%, below the 3.36 TTM average. But it was the take down where we found that Direct allottment dropped from 23.3% to 14.35%, the lowest since May 2013. And since Indirects were generally flat here compared to June, taking down 27%, this means that Dealers had to step in and ended up with 58.7% of the final allocation.
Overall, an uneventful auction and certainly nothing to spook the bond market that that bond bubble which the sellsiders have been scraming about (but not stock bubble, never a stock bubble) is anywhere closer to popping. And why would it: with high quality collateral scarcer now than ever before, expect to see many more such surprises in the months if not years to come.
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Buy Bulgarian bonds too!
I hear Argentina bonds are on sale too... big profits!
Please, in order for anything to be "priced" you need real price discovery. Should be some incredible dancing coming up by your corporate puppets during the upcoming "election".
Fed funds at 4% .... Lol go ahead and invert that curve and watch the mayhem, I dare you. If the Fed funds ever goes up it will never be about 1%.
With the economy as strong as it is right now, the best thing to do is make sure cheap capital is widely available so as not to constrain the 'growth' potential. Plus, I think (this is just me, though) that lower interest rates are good for keeping the weather favorable.
Weather is transitory, a lot like inflation (according to the Bernank anyways). Cheap capital for the connected is forever.
This is where the lies become exposed...so if our economy is going as well as they say it is..then the Fed has to stop QE and start raising rates....and I would think soon....or they are caught lying....
It is strange that some Fed folks are talking about Fed funds rates of 4% in the foreseeable future, when the Fed funds market has shown practically no movement at all for many months. IMO, the reason for this is that this market is far less important as a policy transmission mechanism than formerly. Banks of all sizes continue to distrust each other and use this market far less than before the 2008 crisis. In the meantime, the Fed has developed 2 alternatives to use to transmit policy decisions. These are the rates it offers for excess reserves on deposit with itself, and its recently initiated participation in the repo market.
4% = Open Mouth operations.
Full of sound and fury signifying nothing.
At this point what the Fed says should be taken as either a non-indicator or a contrarian indicator.
And don't forget, "A tale told by an idiot."
People talk about dismissing the scarcity of Capital as though this is an effectively neutral policy decision.
It is not.
Pretending capital has no scarcity because we have unlimited capacity to print money misunderstands the relationship between FRNs and real capital.
If the economy is 'so good' then it REQUIRES higher rates such that only the business plans with greatest probabiliy of success get funded.
To propose that as a discretionary policy 'we ought' to keep rates down during 'the recovery' so that all opportunities can be funded beggars the concept of a recovery.
The otherwise-left-out opportunity is the fraudulent one and the foolish one. But with a choice between only these two we should prefer 'the fool' for often it is not he, but we who are foolish.
No. We should not fund the frauds and fools.
Moreover, the distribution of inflationary cash is not equal. It flows to banking elites first. That pre-disposes the opportunity of disposition for printed money to the frauds. The fools won't get through the bank heirarchy. But the bank will enable frauds propped up by policy as a policy arbitrage, even though they know the fundamentals are fraudulent.
WORSE - as these fraud lines grow they starve legitimate businesses for cash.
Many of the greatest inventions of the last two centuries seemed foolish at the outset. The inventors laughed all the way to the bank.
Today, they will be denied funding by hook or by crook - but the frauds will have and do have cash in spades.
Today's frauds are tomorrow's apparent 'bubbles'.
You have been warned.