July 9. Fed minutes today…
— Ten year note auction today, followed by Fed minutes. Yellen’s semi-annual testimony to the Fed will be next week on July 15.
–Back end of the curve continued to rally with the ten year yield falling over 5 bps to 256.3. Red/gold pack spread made a new low of just 210 bps, also down 5 on the day. Red/green pack spread closed at 100 bps, right at its recent low. As I mentioned yesterday, red/gold should have strong support from 206 (50% retrace 2012 low to 2013 high) to 200 bps.
–Peak one year calendar is still EDZ15/EDZ16, but it closed at only 104 yesterday, down 2.5.
–While the back end of the curve flattens, the front end is still pricing for initial Fed hikes next year. FFQ15 (August next year Fed Fund) is still near 50 bps, settling yesterday at 9951 or 49 bps.
–Between today’s minutes and next week’s Humphrey Hawkins testimony, the market will be trying to pin down the timing for the onset of rate normalization. Just as a point of comparison, I looked at the 4th quarterly contract in 2004, when the Fed first started to lift rates from the 1% FF rate. In mid March, the 4th contract was 9850 or 1.5%. By mid May it had dropped 150 bps to 9694. The first actual rate hike was at the end of June 2004.
