Today, Monday 7 June, the Fed will start selling its positions in 16 corporate debt ETFs ($8.6 billion) as part of its decision to unwind $13.8 billion in ETFs and bonds under the Secondary Market Corporate Credit Facility before the end of the year. The turn for corporate bond sales will come after the summer, in both cases proceeding in a “gradual and orderly” manner.
Attention will be particularly centred on the discussion of QE tapering. Previous comments by regional Fed members Bostic and Kaplan stoked markets into pricing in the possibility of bond market support fading by year-end. When combined with news of an additional $1.9trn fiscal stimulus package being floated in Washington, this resulted in rising 10-year yields, which has been one driver of the USD rebound witnessed at the beginning of this year. A quicker vaccination campaign being rolled out since December has also added to a brighter economic outlook, bringing the discussion of policy normalisation to the table.
The new strategy plays on the asymmetry of monetary policy: it is easier to let inflation accelerate in good times – which only entails not acting (keeping rates unchanged) – than propping it up in bad times, because at some point the latter would require ever more action which would collide with the zero bound limit to policy rates.
Mobeen Tahir, Associate Director, Research, WisdomTree | The biggest challenge facing the Fed in the coming months (and years) is to sketch a roadmap for closing the floodgates of liquidity. At this point in time, it might seem like a ‘nice problem to have’. But given long and variable lags between policy implementation and impact on economy, these are issues the Fed needs to be thinking about now. While the Fed’s mandate is to promote maximum employment and ensure price stability, markets have become highly dependent on central bank accommodation as a propellant. As unemployment (currently 10.2% in the US) decreases and inflation (US Core Personal Consumption Expenditure Index inflation is currently 0.9%) rises closer to the Fed’s desired target level of 2%, the central bank will need to tighten policy.
David Lafferty (Natixis) | Central banks have pinned the front end to zero – or lower – but real rates and inflation premiums have some room to rise into the recovery phase – as slow as it may be. Yields will also see some upward pressure when the Fed and other central banks eventually begin to slow QE purchases. At this point, the Fed would prefer not to discuss going negative as the overnight market recently priced. Another sell-off or prolonged shutdown might put negative rates on the table, but we’re not there yet.
Markus Allenspach, Head Fixed Income Research, Julius Baer | At this stage, the corporate bond market needs support from the Federal Reserve to digest the negative news flow, such as the net tightening of lending standards for commercial and industrial loans in the senior loan officers’ survey published yesterday or the numerous cyclical data showing the depth of the contraction in the current quarter.
J.P.Marín Arrese | Jerome Powell raises the stakes day by day by making bolder than ever decisions. He shatters the image of shyness, prudence and circumspection he offered when taking over the Fed chairmanship. His last daring move has left markets flabbergasted. No wonder. He has pledged 2.3 trillion to buy ungraded bonds and to set up a massive lending facility for Main Street companies, thus breaking the golden rule of including only high-rated paper in the Fed balance sheet.
CaixaBank Research | The Fed has cut interest rates in 2019 for the first time in 11 years. However, it has barely lowered its growth outlook for the US and has justified the cut with the weakness of inflation and the persistence of risks. Is it possible that the Fed has changed its reaction function? The results of the analysis in this article suggest so.
Could the yuan substitute the dollar and become the predominant currency? I would ask the following question: if you had some dollars, would you change them for yuan? No you wouldn’t, would you? We would like to demonstrate that the yuan is in no way a substitute for the dollar.
Benjamin Cole | The worldwide bond market tops $100 trillion, and we live in a world (as we are incessantly told) of global capital markets. All told, there is more than $217 trillion in global debt outstanding, and that figure rises by many trillions every year, reports the Institute of International Finance.