After opening softer yesterday, treasuries caught bids just after 9:00 which carried the 5-year yield below Monday's low while the 10-year yield fell just short, but the rallies ended shortly after a much weaker than expected Consumer Confidence number came out at 10:00.
The FOMC meeting is at 2:00 this afternoon but there almost certainly won't be a rate cut and I'd be surprised if the Statement signaled one coming any sooner than is currently expected, which is June.
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The 5-year yield closed at 3.649 after the September 17th meeting, at 3.697 after the October 29th meeting, and at 3.759 after the December 10th meeting, so let's round them off to 3.65, 3.70, and 3.75, and with the 5-year yield currently just over 3.80, a pattern seems to be emerging. We'll see what we'll see.
Following up on Monday's update, yesterday the dollar took another beating, trading through its low from last September to its lowest level in 4 years. Between last January and July, the dollar fell from 110.18 to 96.38, bounced back to 100.40 in November, and began to weaken again. From around 99.50 on the 19th of this month, it started down and the past 3 days have seen it drop from 98.48 to 95.55.
A weakening dollar is viewed as inflationary since it takes more dollars to buy the same amount goods from other countries, and that is often accompanied by a rally in gold which is also considered, among other things, to be a hedge against inflation, but the impact of a weak dollar on treasuries isn't that simple.
A fear of inflation usually drives investors away from fixed income, but a weakening dollar makes treasuries more attractive to foreign investors, so a weak dollar can be bullish or bearish for treasuries. Given the magnitude of the decline over the past 7 days, especially the past 3, it seems like it should have impacted treasuries one way or the other, but it hasn't, at least not yet.
While the dollar was down sharply all day yesterday, unlike during the previous week, gold remained nearly unchanged until 3:00 when it spiked up $90 in the next hour and when it did, the dollar made new lows.
I don't mean to compare the break in the dollar to the rise in gold — nothing compares to the rise in gold this month or even for the past year+ — but the past week there seems to have been an inverse relationship, which made some sense. The first thing that I looked at this morning was the dollar and when I saw it was up .40, my immediate thought was that at least this morning things were more normal, but then I noticed that gold was up $200 an ounce.
What's going on with the dollar and gold is most unusual and some related and possibly not so minor impact on other financial markets, whatever and to whichever that might be, could still be in the stars.
