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Don’t fear the downside: the Fed will dominate the treasury market for years

(Bloomberg) – Sign up for the New Economy Daily newsletter, follow us @economics, and subscribe to our podcast Treasure investors worried about when the Federal Reserve will cut bond purchases risk missing out the big picture: its more than $ 5 trillion The prospect of a decline in purchases edged closer on Wednesday when the minutes of the Federal Open Market Committee’s April meeting showed that a number of officials were prepared to discuss it if the economy continues to improve. . Yields rose on the news, but bond bulls say the Fed’s virtually inextricable presence in the world’s largest bond market means it will provide crucial support long after price swings occur and disappear when they do. puts an end to the buying frenzy. have doubled since March 2020, accounting for nearly a quarter of the total outstanding, a larger share than it held even after the 2008 credit crunch. This is the result of aggressive measures to keep it operating market and keep rates low on everything from mortgages and auto loans to corporate and municipal bonds. Said Matt Nest, portfolio manager and global head of active fixed income for State Street Global Advisors. The stake is so important that even after the Fed’s buying is done, it should keep its holdings stable by buying new Treasuries whenever the old ones mature. , reducing the amount that should be sold to the public. This has given some investors confidence that rates won’t rise too quickly – or too much – even as yields return to the roughly 14-month high in March, as the economy risks overheating. Certainly not going anywhere anytime soon when it comes to the Treasury market, ”said Mike Pugliese, economist at Wells Fargo Securities, who predicts that the Fed will start cutting back on its purchases in January 2022 and end them around November. keep its stake stable over the next four years. “The Fed will comfortably hold between 20% and 25% of the treasury market, remaining the largest holder of treasury bills, until around 2025,” he said. auctions later this year, as the economy rebounds, are helping to keep yields low despite the strong pick-up in growth and rising consumer prices. The Treasury’s net private borrowing of notes and bonds will fall next year to $ 1.99 trillion from $ 2.75 trillion this year, according to JPMorgan Chase & Co. The central bank’s holdings of Treasury bills have increased by $ 80 billion per month, and that also adds $ 40. billion in mortgage debt on its balance sheet. This has left it on track to buy a total of $ 960 billion in treasury bills and bonds in the secondary market this year after gaining $ 2.18 trillion last year. JPMorgan strategists predict that the Fed will buy an additional $ 390 billion in 2022 before closing its purchases. appropriate at some point in future meetings to start discussing a plan to adjust the pace of asset purchases. The prospect of such a slowdown caused consternation. The 10-year Treasury yield hit the day after minute high, hitting 1.69% as traders boosted bets on the Fed’s rate hike outlook. Those gains were not sustained and the yield fell about 2 basis points to 1.65% on Thursday. The benchmark yield is just over half of the two-decade average, and some analysts are confident that Fed Chairman Jerome Powell and his colleagues will take a cautious approach to ending quantitative easing. “The Fed Powell is reluctant to touch any aspect of its balance sheet, which is why it will be slow to slow down asset purchases and will never sell securities outright. QE, ”said Vincent Reinhart, former Fed official and chief economist at Mellon. Peter Yi, head of taxable credit research at Northern Trust Asset Management, believes the long-term yields on Treasuries are limited. He expects the 10-year yield to hover between 1.25% and 1.75% through the end of 2021 and has bought when yields recover. The percolation of inflation, with the peak in consumer prices in the United States in April since 2009, will prove to be temporary, he added. “The Fed has tools in its toolbox that it will use if it absolutely needs them to prevent 10-year yields. to jump in a spectacular and disorderly fashion, ”Yi said. The last time the Fed started pulling back from asset purchases was from January to October 2014, when it rolled back quantitative easing measures that began after the 2008 credit crunch. Treasury bill yields rose in 2013 in anticipation of this, the effects were mitigated as yields fell in 2014. The Fed was in no rush to offload its bond holdings, however, and continued to turn them into new ones. securities when they have matured. In October 2017, the bank started shrinking its portfolio, only to stop abruptly in September 2019 when it wreaked havoc on the day-to-day lending market. the Fed shrinks its balance sheet for years. “It is becoming increasingly difficult for the Fed to extricate itself from the financial system,” Krieter said. “At least for the next five years or so, the Fed won’t even hint at reducing its balance sheet.” (Updates prices throughout.) More articles like this are available at bloomberg.com along with the most trusted source of business news. © 2021 Bloomberg LP

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