RESEARCH ROUNDUP: Fed’s Gradual Balance Sheet Plan Boosts USTs
(Bloomberg) -- Minutes of FOMC’s May 2-3 meeting, released on Wednesday, appear to have spurred gains in Treasuries, according to MFR’s Joshua Shapiro; Fed is seen as raising rates again in June, economists and strategists said in published commentary.
- U.S. stocks closed at fresh records after the FOMC minutes were released, while the dollar slipped with Treasury yields; investors saw signs that Fed officials were unperturbed by recent economic weakness
- BlackRock (portfolio manager Bob Miller)
- Data sufficiently support further rate normalization by Fed
- Policy makers likely to deliver a rate increase next month, despite “quiet” minutes from May meeting
- Markets not adequately pricing in continued policy normalization over the next year; expectations will likely have to adjust
- BMO (Aaron Kohli)
- Minutes strongly suggest that 4Q “is on the table for the tapering timeline,” and more discussion and headlines are likely to come in June
- In “mildly dovish sign,” minutes didn’t imply active selling of MBS
- Overall tone of minutes was “cautious”
- Capital Economics (Paul Ashworth)
- Fed on track for June rate increase
- Would make sense for Fed to begin with cap on run-offs as low as $20b in UST, MBS and increase that cap by $10b every quarter
- NOTE: Fed minutes suggested possibly using caps as approach toward balance-sheet reduction
- A plan to proceed “very, very” cautiously with shrinking balance sheet would lead to smaller risk of adverse reaction in bond market
- CIBC (Royce Mendes)
- Minutes reflect “more gradualism and fine tuning” by a Fed “that wants to carefully manage how the yield curve responds”
- Easing financial conditions from weakening USD, long- term yields support June rate increase
- FTN (Jim Vogel)
- FOMC seems to have “‘warmed’’ quickly to staff’s idea for reducing balance sheet through rolling caps; market didn’t expect a balance-sheet plan ‘‘this smooth”
- While Fed said the process would be gradual, “this is a big shift in direction from what economists and street pundits had suggested”
- Flatter curve seen for the next 9-12 months
- MORE
- MFR (Joshua Shapiro)
- While minutes suggest a June hike, “there were enough cautionary notes” that “Fed-speak will be necessary to make a June move clearer”
- Gradual process of ending reinvestments “has pleased Treasuries, which are rallying despite the hint that the next tightening move could be as soon as next month”
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
People Aaron Kohli (Bank of Montreal)
Bob Miller (BlackRock Financial Management Inc)
Jim Vogel (Ftn Financial)
Joshua Shapiro (Maria Fiorini Ramirez Inc)
Paul Ashworth (Capital Economics Na Ltd)
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