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Financial markets react ahead of the FOMC and Scottish referendum
The Federal Open Market Committee (or FOMC) is the main policy-setting body of the U.S. Federal Reserve. Any decisions on interest rates and money supply tend to create waves in financial markets worldwide.
The U.S. Treasury auctioned one-month Treasury bills worth $35 billion on September 9. The auction was smaller compared to the previous week’s offering of $39 billion. As a result, the bid-to-cover ratio rose by ~5.3% to 4.73x week-over-week.
The U.S. Treasury auctioned $26 billion worth of six-month Treasury bills last week. The issue size was lower than the $28 billion auctioned the previous week. The high discount rate was also lower, at 0.02% compared to 0.025% in the September 2 auction.
Last week, the U.S. Treasury held auctions for three Treasury bill maturities: the 4-week, 13-week, and 26-week Treasury bills (or T-bills). A total of $84 billion worth of T-bills were auctioned.
Treasury yields and yields on U.S. corporate bonds usually move in the same direction in response to economic data. Due to the factors described in the previous part of this series, yields on corporate bonds rose over the week.
Markets chose to treat the less-than-satisfactory labor market data as a blip. Job creation had been very strong in 2014. Total non-farm payrolls had crossed pre-recession levels.
Investment-grade bond (BND) yields are usually bear a strong relationship with economic trends. Disappointing economic data generally results in bond yields falling, while positive data points to an uptrend, resulting in rising yields.
Other U.S. corporate borrowers accounted for ~28% of the issuance in the week of September 12. Major domestic issuers included Dow Chemical ($2.0 billion), John Deere ($1.25 billion), and 21st Century Fox America ($1.2 billion).
Almost a third of investment-grade bond (BND)(LQD) issuance in the week consisted of Yankee bonds issued by overseas financial and non-financial firms. Yankee bonds are USD-denominated bonds issued in the U.S. market by foreign issuers.
Corporate borrowers issue debt in the primary capital market. The debt is either privately placed to individuals and institutions or marketed to investors through underwriters or investment banks like JPMorgan or Goldman Sachs.
The 30-year bond is the longest-maturity Treasury security. These auctions attract a lot of market attention from both stock (SPY)(DIA) and bond (TBF) investors. Thirty-year Treasury yields reflect long-term economic growth and inflation expectations.
The ten-year Treasury (IEF) note auction is of great interest to stock and bond (BND) market participants. Ten-year Treasury yields are benchmarks for many interest rates, including mortgages (IYR)(VNQ) and equity risk premiums (QQQ).
The U.S. Treasury holds monthly auctions for three-year Treasury notes (or T-notes). Three-year notes are one of the most sensitive maturities to short-term rate movements. So these auctions are closely watched by stock (IVV)(DIA) and bond (UST) market participants.
This series is a weekly update on the trends in the U.S. investment-grade bond markets. You’ll read about both primary and secondary market activity in both the U.S. Treasury and corporate bond markets.
Today, most measures of credit conditions are positive, with tight spreads across all of fixed income. Even high yield spreads have come in after a short scare last month.
The two weeks following the September 5 week will be critical for bond investors. There are likely to be implications for both primary and secondary markets in investment-grade debt. As mentioned earlier, bond investors need to watch economic indicators as they can significantly affect returns on ETF investments.
The U.S. Treasury auctioned one-month Treasury bills worth $40 billion on September 3. The auction size was downsized by 20%, compared to the previous week’s $50-billion offering. The bid-to-cover ratio rose by ~18% to 4.49x, week-over-week.
The U.S. Treasury held the weekly auction for three-month (or 13-week) Treasury bills on September 2. $28 billion worth of T-bills were on offer. The issue size was lower than the $29 billion auctioned the previous week.
The US Treasury held weekly auctions for three Treasury bill maturities last week—the four-week, 13-week, and 26-week Treasury bills (or T-bills). A total of $52 billion worth of T-bills were auctioned. Treasury bills mature in a year or less. They’re at the very short end of the yield curve. Other Treasury securities like Treasury notes (IEF) and bonds (TBF) are issued for longer maturities.
Investment-grade bond yields generally follow cues from the Treasuries market. Due to rising Treasury yields, investment-grade corporate bond yields rose by nine basis points to 3.02% over the week.