Renewed questions as to the health of the European Economic Union coupled with news of slowing growth in China, India and here at home sparked a strong rally in the Treasury market this past month.
Treasuries rally more pronounced
While this may read like the same “Treasuries rally” market commentary from March or April, the May market move was more pronounced. Treasuries of all maturities were either sold at auction or were traded at record low yields during May. The 10-year Treasury note, for instance, hit a record low 1.45% during the closing days of the month—down from 1.94% on May 1st. That’s an impressive 49 basis point move from an already low level.
Municipal bond yields moved only slightly
Municipal bond yields moved lower as well during the month, but were less affected. AAA rated, 10-year municipal bonds started May at 1.88% and ended at 1.80%. That relatively small drop-off in yield came despite continued strong demand and rather weak issuance.
Don’t fight the Fed
The Federal Reserve has been actively purchasing longer dated Treasury notes and bonds as part of Operation Twist. This program is set to wind down in June. There is speculation that absent Fed purchases, there are few buyers willing to step in to buy Treasuries at such low yields. Further analysis seems to reveal that these fears may be misplaced.
At the May 17th auction for instance, Treasury sold $13 billion in 10-year inflation protected securities, or TIPS – and the Fed accounted for only 14% of the orders. Demand for Treasury securities has been very strong with orders covering more than three times total debt sold at several auctions held during the month.
Granted, the “fear trade” could weaken, but it looks improbable yields will spike anytime soon. If rates do spike, the Fed could step back in to drive yields back down. The current mantra of many – “Don’t fight the Fed” – continues to prevail.
Please contact your Investment Specialist if you have any questions on these latest market moves.
Jeffrey D. Irish
Bernardi Securities, Inc.
June 6, 2012