Daily Market Color

Treasury Yields Higher After Funding Agreement in Senate

Senate Leaders Agree on Two-Year Budget

This afternoon Senate lawmakers reached a bipartisan agreement on a two-year spending budget for the US government.  Highlights of the deal include $300 billion in additional funding, with $85 billion to be utilized by defense spending and $131 billion in non-defense spending, which would include $20 billion on infrastructure.  Also noted in the agreement, a portion of the funding would be allocated towards disaster relief, opioid abuse and the Children’s Health Insurance Program.  The deal will still require passage by the House of Representatives, where there have already been rumors of Democrats’ unhappiness over the proposal’s lack of addressing immigration policy.

US Treasurys sold off following the announcement, with yields/swap rates climbing 1-5bps across the curve in a bear-steepening pattern.  The yield on the 10-year note finished 3bps higher at 2.84%.  The US dollar gained on the day, advancing 0.6% against major currencies to a two-week high.  In the equity markets, major indices experienced a 4th consecutive volatile session.  The DJIA swung within a 500-point range throughout the trading session, before finishing marginally lower (-0.1%).  Both the S&P 500 (-0.5%) and Nasdaq (-0.9%) similarly posted incremental losses on the day.  In commodities, WTI crude oil tumbled 2.6% for the session, finishing near $61.60/barrel and weighed down by reports of increased production in the US.               



Fed Members Weigh-in on Market Conditions

Dallas Fed President Robert Kaplan (neutral, non-voter): “I think it’s healthy that there is some correction, a little more volatility in markets…can be a healthy thing,” speaking on this week’s equity movements.  Kaplan also weighed in on the long-term neutral interest rate, stating its likelihood “to be lower than what we’re accustomed to historically, and I think that’s another thing that probably should be emphasized.”
New York Fed President William Dudley (dove, voter set to retire this summer): “So far this is a big story” speaking on the market volatility, “but I don’t think it’s a big story at all for central bankers.”  Separately, Dudley spoke on banking regulation and his belief that any rollback would be limited, stating “I don’t think the deregulation swing is going to be that great.”  
Chicago Fed President Charles Evans (dove, non-voter): Referencing the continued struggle for inflation to reach the Fed’s 2% target, Evans suggested holding off on rate hikes until mid-2018.   “If we get to that point and have more confidence that inflation is moving up sustainably, then further rate increases would be warranted,” Evans stated.

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