Market News Interest rate hike expectations are heating up again! The Fed officially entered the era of quantitative tightening from today
Interest rate hike expectations are heating up again! The Fed officially entered the era of quantitative tightening from today
Andrew Hunter, senior U.S. economist at Capital Economics, pointed out, “The main impact of quantitative tightening will be seen indirectly through its impact on financial conditions, which will put upward pressure on the U.S. Treasury term premium, coupled with further economic growth. A slowdown will add to the headwinds facing equities. Also, the key uncertainty is how long the Fed's tapering will last."
2022-06-01
11666
Despite a sustained rally over the past few weeks, U.S. Treasuries resumed their losses in the first trading day after the Memorial Day holiday, pushing the benchmark 10-year U.S. Treasury yield to its highest level in more than three weeks. The gains came as inflation concerns resurfaced and economic data supported expectations for multiple 50 basis-point rate hikes by the Federal Reserve in the coming months.
According to market data, the yields of U.S. Treasury bonds of various maturities generally rose sharply overnight: the yield on the 2-year U.S. Treasury bond rose 7.9 basis points to 2.567%, the yield on the 5-year U.S. Treasury bond rose 10.2 basis points to 2.825%, and the 10-year U.S. Treasury bond yield rose 10.2 basis points to 2.825%. The yield rose 10.8 basis points to 2.85%, while the yield on the 30-year U.S. Treasury bond rose 8.2 basis points to 3.049%. U.S. Treasury markets were closed globally on Monday for Memorial Day in the United States.
At the beginning of the week, oil prices climbed to a more than two-month high, while inflation data from major euro zone members in May generally "boomed", fueling speculation that central banks will tighten policy in the summer.
Data released on Tuesday showed that the euro zone's consumer price index (CPI) jumped 8.1% in May from a year earlier, beating the 7.8% median forecast of economists polled by the media. The acceleration in inflation has been driven by food and energy prices, with the Russian-Ukrainian conflict leading to sharply higher commodity prices.
In fact, the sharp rise in U.S. bond yields on Tuesday was largely driven by the surge in European bond yields the previous day. On Monday and Tuesday, the basis-point rise in bond yields across major euro zone member countries generally hit double digits for two consecutive days. With the United States and the United Kingdom starting to raise interest rates in full force in the past few months, the European Central Bank has also begun to prepare for the first interest rate hike in more than a decade in response to an unprecedented price surge in the euro zone.
European Central Bank President Christine Lagarde said last week that the central bank could raise rates by 25 basis points at its July and September meetings. And some ECB officials have even floated the idea of raising rates by 50 basis points, similar to the pace of the latest Fed rate hike, which would be the first in ECB history. Dutch central bank governor Klaas Knot said inflation data for May and June will determine whether the move is necessary.
Fed rate hike expectations are rising again
On the Fed's side, U.S. President Biden met with Fed Chairman Powell and Treasury Secretary Yellen on Tuesday local time, focusing on inflation.
In remarks before and after the meeting, Biden said tackling inflation was his top priority. He also pointed to the Fed's dual mandate, including full employment and stable prices, and he looked to Powell to continue his leadership in tackling inflation.
What's interesting is that although the market's expectations for the Fed to suspend interest rate hikes in September were once high after the release of the Fed minutes last week, under the influence of the rekindling of global inflation expectations this week and the speeches of the Fed's hawkish officials, the Fed in September The probability of raising interest rates by 50 basis points seems to be showing a resurgence again.
The latest speech by Waller, a hawkish Fed official and governor this week, may have played a key role in this.
Federal Reserve Governor Christopher Waller (Christopher Waller) said in a speech in Frankfurt that day that he supports continuing to raise the policy rate by 50 basis points each in the next few meetings. He added that he would not change that view until he saw inflation fall closer to the Fed's 2 percent target.
Waller said such expectations represent a more aggressive policy tightening that would be consistent with the Fed's commitment to lower inflation. He also noted that "if we need to do more, we will."
Obviously, Waller, who has worked with the Fed's "eagle king" Bullard for a long time at the St. Louis Fed, is now no less than Bullard's tightening stance.
After Waller's speech on Monday, data from the Chicago Mercantile Exchange (CME) showed renewed expectations that the Federal Reserve will continue to raise interest rates significantly -- investors are now pricing in the federal funds rate rising to 2.25% after the September meeting. Expectations between -2.50% (50 basis points of interest rate hikes in the next three meetings) are again at 58%, up from 37% at the start of the week.
The era of quantitative tightening officially opened today
Today will be the first trading day of the June market, and for the Fed, this day will undoubtedly be of commemorative significance!
This will mark the official start of a new round of quantitative tightening (QT) in its history - the Federal Reserve has announced at its May meeting that it will start June 1 with a monthly payment of up to $47.5 billion (of which $30 billion in Treasuries, It will shrink the balance sheet at a pace of USD 17.5 billion in MBS), and will gradually increase the cap of the reduction of the balance sheet to a maximum of USD 95 billion per month (including USD 60 billion in treasury bonds and USD 35 billion in MBS) within three months.
By the end of 2024, the Fed will shrink its balance sheet by an average of $80 billion a month, according to a guideline released last week by the New York Fed. By mid-2025, the size of the Fed’s securities portfolio could fall to $5.9 trillion. That would herald a sharp drop of about $2.5 trillion in the Fed's total holdings of Treasuries and mortgage-backed securities (MBS) over the next three years.
The New York Fed expects that, by shrinking its balance sheet for three years, by mid-2025, the Fed's balance sheet holdings may fall to around 22% of U.S. GDP, after which the size of the balance sheet will begin to increase again. .
For investors, the impact of Fed rate hikes on the market may be easy to quantify, but it may be difficult for even the Fed itself to have a clear understanding of the specific impact of the shrinking balance sheet. In the history of the Federal Reserve, the "bullish man" in the global financial market has never had such a precedent for a sharp reduction in the balance sheet while raising interest rates so aggressively. All these unknowns may exacerbate market turmoil.
Dan Eye, chief investment officer at Fort Pitt Capital Group, said: “I don’t think we have a clear picture of the impact of quantitative tightening, especially since we haven’t done that many times in our history of balance sheet thinning. But for sure, it Liquidity will be taken out of the market, and there is reason to believe that as liquidity is taken out it will affect valuation multiples to some extent.”
Andrew Hunter, senior U.S. economist at Capital Economics, pointed out, “The main impact of quantitative tightening will be seen indirectly through its impact on financial conditions, which will put upward pressure on the U.S. Treasury term premium, coupled with further economic growth. A slowdown will add to the headwinds facing equities. Also, the key uncertainty is how long the Fed's tapering will last."
Article source: Financial Associated Press
According to market data, the yields of U.S. Treasury bonds of various maturities generally rose sharply overnight: the yield on the 2-year U.S. Treasury bond rose 7.9 basis points to 2.567%, the yield on the 5-year U.S. Treasury bond rose 10.2 basis points to 2.825%, and the 10-year U.S. Treasury bond yield rose 10.2 basis points to 2.825%. The yield rose 10.8 basis points to 2.85%, while the yield on the 30-year U.S. Treasury bond rose 8.2 basis points to 3.049%. U.S. Treasury markets were closed globally on Monday for Memorial Day in the United States.
At the beginning of the week, oil prices climbed to a more than two-month high, while inflation data from major euro zone members in May generally "boomed", fueling speculation that central banks will tighten policy in the summer.
Data released on Tuesday showed that the euro zone's consumer price index (CPI) jumped 8.1% in May from a year earlier, beating the 7.8% median forecast of economists polled by the media. The acceleration in inflation has been driven by food and energy prices, with the Russian-Ukrainian conflict leading to sharply higher commodity prices.
In fact, the sharp rise in U.S. bond yields on Tuesday was largely driven by the surge in European bond yields the previous day. On Monday and Tuesday, the basis-point rise in bond yields across major euro zone member countries generally hit double digits for two consecutive days. With the United States and the United Kingdom starting to raise interest rates in full force in the past few months, the European Central Bank has also begun to prepare for the first interest rate hike in more than a decade in response to an unprecedented price surge in the euro zone.
European Central Bank President Christine Lagarde said last week that the central bank could raise rates by 25 basis points at its July and September meetings. And some ECB officials have even floated the idea of raising rates by 50 basis points, similar to the pace of the latest Fed rate hike, which would be the first in ECB history. Dutch central bank governor Klaas Knot said inflation data for May and June will determine whether the move is necessary.
Fed rate hike expectations are rising again
On the Fed's side, U.S. President Biden met with Fed Chairman Powell and Treasury Secretary Yellen on Tuesday local time, focusing on inflation.
In remarks before and after the meeting, Biden said tackling inflation was his top priority. He also pointed to the Fed's dual mandate, including full employment and stable prices, and he looked to Powell to continue his leadership in tackling inflation.
What's interesting is that although the market's expectations for the Fed to suspend interest rate hikes in September were once high after the release of the Fed minutes last week, under the influence of the rekindling of global inflation expectations this week and the speeches of the Fed's hawkish officials, the Fed in September The probability of raising interest rates by 50 basis points seems to be showing a resurgence again.
The latest speech by Waller, a hawkish Fed official and governor this week, may have played a key role in this.
Federal Reserve Governor Christopher Waller (Christopher Waller) said in a speech in Frankfurt that day that he supports continuing to raise the policy rate by 50 basis points each in the next few meetings. He added that he would not change that view until he saw inflation fall closer to the Fed's 2 percent target.
Waller said such expectations represent a more aggressive policy tightening that would be consistent with the Fed's commitment to lower inflation. He also noted that "if we need to do more, we will."
Obviously, Waller, who has worked with the Fed's "eagle king" Bullard for a long time at the St. Louis Fed, is now no less than Bullard's tightening stance.
After Waller's speech on Monday, data from the Chicago Mercantile Exchange (CME) showed renewed expectations that the Federal Reserve will continue to raise interest rates significantly -- investors are now pricing in the federal funds rate rising to 2.25% after the September meeting. Expectations between -2.50% (50 basis points of interest rate hikes in the next three meetings) are again at 58%, up from 37% at the start of the week.
The era of quantitative tightening officially opened today
Today will be the first trading day of the June market, and for the Fed, this day will undoubtedly be of commemorative significance!
This will mark the official start of a new round of quantitative tightening (QT) in its history - the Federal Reserve has announced at its May meeting that it will start June 1 with a monthly payment of up to $47.5 billion (of which $30 billion in Treasuries, It will shrink the balance sheet at a pace of USD 17.5 billion in MBS), and will gradually increase the cap of the reduction of the balance sheet to a maximum of USD 95 billion per month (including USD 60 billion in treasury bonds and USD 35 billion in MBS) within three months.
By the end of 2024, the Fed will shrink its balance sheet by an average of $80 billion a month, according to a guideline released last week by the New York Fed. By mid-2025, the size of the Fed’s securities portfolio could fall to $5.9 trillion. That would herald a sharp drop of about $2.5 trillion in the Fed's total holdings of Treasuries and mortgage-backed securities (MBS) over the next three years.
The New York Fed expects that, by shrinking its balance sheet for three years, by mid-2025, the Fed's balance sheet holdings may fall to around 22% of U.S. GDP, after which the size of the balance sheet will begin to increase again. .
For investors, the impact of Fed rate hikes on the market may be easy to quantify, but it may be difficult for even the Fed itself to have a clear understanding of the specific impact of the shrinking balance sheet. In the history of the Federal Reserve, the "bullish man" in the global financial market has never had such a precedent for a sharp reduction in the balance sheet while raising interest rates so aggressively. All these unknowns may exacerbate market turmoil.
Dan Eye, chief investment officer at Fort Pitt Capital Group, said: “I don’t think we have a clear picture of the impact of quantitative tightening, especially since we haven’t done that many times in our history of balance sheet thinning. But for sure, it Liquidity will be taken out of the market, and there is reason to believe that as liquidity is taken out it will affect valuation multiples to some extent.”
Andrew Hunter, senior U.S. economist at Capital Economics, pointed out, “The main impact of quantitative tightening will be seen indirectly through its impact on financial conditions, which will put upward pressure on the U.S. Treasury term premium, coupled with further economic growth. A slowdown will add to the headwinds facing equities. Also, the key uncertainty is how long the Fed's tapering will last."
Article source: Financial Associated Press
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