US rates: Weekly review

The September FOMC minutes suggest that many at the Fed prefer waiting for additional information before raising rates. It is believed that the market is already assigning a high likelihood of the Fed not being able to get off the ZLB and maintain the recommendation of paying fixed on 5y swaps and 10s30s Treasury curve flatteners. Separately, the flow of funds data suggest that foreign investor base for US fixed income is likely shifting away from official investors to private investors. 

US Treasury yields rose this week, mostly reversing the rally in response to the weaker- than-expected September payroll report; 5y Treasury yields rose from the lows of 1.21% to as much as 1.41%. Financial conditions eased over the past few days as credit spreads tightened, the broad trade-weighted dollar weakened and equity markets rallied, likely due to the weaker-than-expected payroll report and modestly dovish September FOMC minutes. 

The Fed released the September FOMC minutes, which suggest that while the majority at the Fed were not too concerned about financial developments, they preferred waiting for additional information before raising rates. Specifically, the minutes noted that "[members] agreed that developments over the intermeeting period had not materially altered the Committee's economic outlook. Nevertheless, in part because of the risks to the outlook for economic activity and inflation, the Committee decided that it was prudent to wait for additional information confirming that the economic outlook had not deteriorated and bolstering members' confidence that inflation would gradually move up toward 2 percent over the medium term."