All Together Now

Good 10-year auction, especially considering it was a reopening of the existing 10-year note. The bid to cover ratio was 3.24.. This was better than the 2.96 seen on this exact bond when it was originally issued. It was also better than the 2.96 average for the last 10 auctions. Indirect bidders, which included foreign central banks, purchased 40.2% of the deal versus a 41.3 average for the past 10 auctions. This was a good auction.

Economist sentiment, Fed Beige Book data and Fed Chairman Bernanke's testimony before the House Budget Committee all were consistent with the strength of demand at today' 10-year auction.


A survey of economists by Bloomberg News reveals that the consensus opinion calls for the first Fed Funds rate hikes will occur in 2011. Fragility of the recovery, problems in Europe and a lack of inflation should keep the Fed on the sidelines for 2010. There is one Fed official who believes the fed should get into the rate hike game. Kansas City Fed President Thomas Hoenig is once again urging fed Fund rate increases as he believes the economy has sufficient traction to expand on its own. He repeated is call for the Fed to raise the Fed Funds rate to 1.00% by this September. However, he is a lone voice. Unless we see robust consumer spending fueled by strong job growth and balance sheet transparency from European banks (with good news being reported), it is unlikely that the Fed will begin tightening this year.

The Fed's Beige Book reported that all 12 Fed regions reported improved economic activity, but most region described the improvement as being modest. Fed Chairman Bernanke had this to say:


"Our ongoing international cooperation sends an important signal to global financial markets that we will take the actions necessary to ensure stability and continued economic recovery."

"We will have no easy resolution to the challenges we face in restoring jobs and strengthening the economy."


Any lasting recovery will require consumer spending. Increased consumer spending requires robust job growth (or cheap, irresponsible credit). The Fed is just about out of ammo. However, all is not lost. 3% growth is attainable and after all, 3% is approximately the average annual growth rate of the United States since its founding (at least it was when I was in school).

Meanwhile there are some relative bargains in the market. No not TIPS, they are rich, but one large bank issued three-year bonds today which should price in the 5.30% area. Just some food for thought.