The U.S. Federal Reserve’s (Fed) balance sheet reduction policy may end this year, which is a good reason for U.S. government bonds to continue their gains in 2023, but the positive effects may be offset by factors such as the fiscal deficit.
Minutes of the Fed’s December 12-13 meeting released earlier this week showed that some officials have begun discussing the conditions for ending the reduction in cash and bond positions. Under this policy, known as quantitative tightening (QT), the Fed allowed principal in Treasuries and mortgage-backed securities (MBS) to mature, reducing the balance sheet by nearly $100 billion each month.
So far, the Fed has implemented QT, which has reduced the total by more than 1 trillion US dollars, and as of December 27, the total size has dropped to 7.764 trillion US dollars.
Some market participants said that for U.S. debt, the QT is about to end, which is seen as another positive thing in addition to the Fed’s move to cut interest rates. Driven by expectations of interest rate cuts,10-Year Treasury Bond YieldIt has retreated more than 100 basis points from the 16-year high hit in October last year, representing a reverse upward trend in prices. It also reversed what would have been an unprecedented third consecutive year of declines in U.S. debt.
However, market participants also pointed out that the U.S. fiscal deficit is expected to swell to US$20 trillion over the next decade, as well as the potential reduction in demand from major foreign buyers, which has restrained the possible gains in U.S. debt.
“The QT deceleration is more negative, but I think the deterioration in fiscal conditions has a bigger impact,” said Vishal Khanduja, co-head of fixed income broad markets at Morgan Stanley Investment Management.
Another thing worth noting is that the timing of the end of QT may be difficult to determine, and it usually does not necessarily occur at the same time as a rate cut.
Analysts at Deutsche Bank said on Thursday (4th) that they predict that the U.S. economy may be in recession, and if the Fed cuts interest rates in response to this, QT may end as soon as June. On the other hand, if the U.S. economy achieves a soft landing, where growth is strong and inflation cools, QT could extend into next year.
The Fed’s survey of primary traders at its December meeting was more conservative. According to the survey results released on Thursday, these large Wall Street banks surveyed predicted that the Fed may not end its balance sheet reduction until December this year, which is more than originally expected. The time point is later.
Matthew Miskin, co-investment strategist at John Hancock Investment Management, said the Fed’s balance sheet measures may be synchronized with interest rate adjustments, but a better-than-expected non-farm payrolls report like Friday’s is consistent with the logic of shrinking the balance sheet in the short term. conflict.
He said: “While ending QT is positive for U.S. debt, QT policy itself is a mystery and the effect is usually not as significant as people think.”
2024-01-06 06:02:12
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