Powell and the Fed Have Zero Control Over the Long Bond

Day two of Federal Reserve Chairman Jerome Powell’s congressional testimony was much like the first. He reiterated Thursday that the economy is “in a very good place,” but that the central bank has room to lower interest rates to keep the expansion on track. As dovish as that may sound, the comments didn’t offer much comfort to bond traders – they had other things on their minds.

For the second time this week, the U.S. Treasury held a bond auction that met with less than stellar demand, triggering losses across all maturities and pushing yields on longer-dated debt to their highest since May. Investors submitted bids for just 2.13 times the $16 billion of 30-year bonds offered. To put that in perspective, consider than in the almost 50 auctions of that maturity since mid-2015, the bid-to-cover ratio has been lower just three times. Not only that, the yield of 2.644% was higher than the 2.618% the securities were trading at just before the auction, generating the highest so-called tail since early 2016 and confirming the weak demand. “Friendless long bonds abandoned at sale,” is how FTN Financial interest-rate strategist Jim Vogel titled his report on the auction. While short-term debt is highly influenced by the direction of monetary policy, longer-term securities are more sensitive to things like inflation and perceived creditworthiness. And in that regard, bond investors have plenty to worry about. The government said just a few hours before the auction that the core consumer price index, which excludes food and energy, rose 0.3% from the prior month, the most since January 2018 and enough to raise doubts about the notion that inflation really is dead.