Good Morning on this best day of the week, Wednesday,
Yesterday was actually a pretty good day for bonds, all things considered. Mortgage bonds were a lot less volatile than they could have been. The 10-yr Treasury yield is creeping higher though, and today is testing support at the 25-day moving average of 1.64%. This could be a precursor to mortgage bonds losing more ground, so be alert. If the 10-yr yield does break above and close above the 1.64% level we could see it quickly rise up to test 1.74. Stocks are slipping a bit as well. Markets are waiting on Federal Reserve officials to wrap up their two-day policy meeting today, at which they are likely to maintain ultralow interest rates to support the economy’s accelerating recovery. The central bankers have noted in public comments the recent pickups in hiring, spending, and inflation, but have signaled no readiness to consider changing the Fed’s key policies. The commentary on bond purchases and inflation will likely drive markets one way or the other. From the bond side of things, we are certainly hopeful the Fed will commit to continuing to buy bonds ($80b of Treasuries and $40b of Mortgage bonds monthly). If the Fed were to walk those numbers back or discuss inflation being allowed to rise, bond prices will fall and rates will rise. We will get that news in just under 2 hours followed by a press conference at 11:30 Pacific.
Other important news:
President Joe Biden is unveiling a $1.8 trillion “American Families Plan” in his first address to a joint session of Congress today. The legislative proposal includes $1 trillion in spending and $800 million in tax cuts and credits for middle- and lower-income families. The 10-year plan would be part funded by tax hikes on the wealthiest Americans. Private equity’s coveted “carried interest” tax break is among the targets in the reform of the tax code.
Speaking of taxes, the White House is proposing raising the tax agency’s (IRS) budget by $80 billion over the next decade to help strengthen its enforcement of tax rules on wealthy people. The plan aims to boost resources for conducting audits, and the administration estimates it would generate $700 billion in net tax revenue that would have otherwise gone uncollected. The IRS has shrunk over the past decade due to budget cuts, and audit rates of individuals have hit 40-year lows recently, with the agency saying it devotes 30% less in funding and staff to tax enforcement than it did in 2010.
I am expecting above average volatility today once the Fed announcement is released, so good idea to pay defense now and lock or to stay close to the news so you can lock quickly if the news is not bond friendly.
Please remain safe and healthy, make today great.