In the first Treasury auction in the new phase of the Fed debt monetization program, the 10 year yield at 2.73% was about in line with the when issued level and the bid to cover of 3.04 is a touch above the 12 month average of 2.99. The helping hand of Fed expressed economic worries and outright purchases of Treasuries has clearly further distorted the US Treasury market, thus making any analysis of it at this point difficult to make in terms of what participants really believe rather than what they feel comfortable buying because the Fed says so. A big part of inflation or deflation is the expectations of it in the future as that alters current behavior. Is the Fed’s obsession with fighting deflation feeding market expectations of deflation that markets wouldn’t have felt on its own? Can’t we just be in a low inflationary time with deflation in some things and inflation in others that doesn’t warrant panic responses from the Fed.
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