Treasurys Edge Higher Following FOMC Minutes, Global Political Tensions

Today’s release of the minutes from January’s FOMC meeting displayed a similar tone to what has been communicated by Janet Yellen and other Fed officials over the past few weeks.  While a majority of the committee agreed that a rate hike could be justified “fairly soon,” many still “continued to see only a modest risk of a scenario in which the unemployment rate would substantially undershoot its longer-run normal level and inflation pressures would increase significantly.”  Highlighted often within the minutes were the requirements for inflation and labor data to continue trending towards the Fed’s long run targets, which stand to be impacted by “heightened uncertainty” surrounding future fiscal policy decisions made by the Trump administration.  Fed voting members will get the opportunity to view February’s consumer price and employment data prior to March’s FOMC meeting, which currently holds a 34% probability of a rate hike as implied by fed fund futures.  The unwinding of the central bank’s balance sheet, another topic of interest to investors, was not discussed at the meeting, however it was acknowledged that conversations around the $4.5 trillion portfolio would be appropriate “at upcoming meetings.”  Treasurys rallied from the onset of the session, and yields/swap rates are currently 1-3 bps lower across the curve.  The yield on the 10-year note decreased 1.5 bps to 2.41%.  Major US stock indices traded sideways throughout the day, with the DJIA (+0.16%) finishing marginally higher while the S&P 500 (-0.11%) and Nasdaq (-0.09%) fell from yesterday’s record highs.  The US dollar edged lower against major peers, down 0.2%, with the largest losses recorded against the yen (-0.6%) and euro (-0.3%).               

Existing Home Sales Rise to Highest in a Decade
As reported by the National Association of Realtors, the number of US home resales increased to a seasonally adjusted rate of 5.69 million during January, the highest reading since 2007.  The figure represents a 3.3% jump from December’s 5.51 million revised level.  Compared to a year earlier, the median sale price climbed 7.1% last month, as a dwindling supply of available homes drove values higher.  The current pace of sales yields a 3.6-month time period to deplete the entire stock of homes up for sale, a shorter term than the 5-month threshold associated with a tight market.  37% of the previously owned homes sold during January were on the market for less than a month, demonstrating that the rise in mortgage rates since the election and historically low levels of supply have yet to slow down the momentum in home buying.            

German Yields Fall to Record Lows
As uneasiness continues to build surrounding the outcome of the French presidential election, investors in the region have fled to safe haven assets, most notably Germany’s two-year note.  France’s most recent polls display far right candidate Marine Le Pen closing the gap between herself and a second-round competitor, prompting concerns that the anti-euro, anti-immigration Le Pen may be the next in line to benefit from the global rise in populism.  The yield on German debt maturing in two years declined as much as five basis points to an all-time low of -0.915%, with the spread between similar-maturity Treasurys widening to a 17-year high of 2.13%.  German bunds reversed a portion of their gains following today’s earlier announcement that French centrist Francois Bayrou had offered an alliance with independent candidate Emmanuel Macron, who stands as Le Pen’s most likely rival in second-round voting.  Explaining the move, Bayrou stated that “We are in an extremely risky situation, and to tackle this exceptional situation, I think we need an exceptional response.”