{"id":109886,"date":"2021-11-04T11:15:00","date_gmt":"2021-11-04T15:15:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/?p=109886"},"modified":"2022-11-21T09:49:01","modified_gmt":"2022-11-21T14:49:01","slug":"fed-watch-moving-onand-rather-quickly","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/fixed-income\/fed-watch-moving-onand-rather-quickly\/","title":{"rendered":"Fed Watch: Moving On\u2026and Rather Quickly"},"content":{"rendered":"\n

The Fed\u2019s<\/a> announcement to begin tapering<\/a> its balance sheet<\/a> was a well-telegraphed development that, in and of itself, should not really have any meaningful impact on the money and bond markets. Sure, the actual implementation of scaling back its asset purchases could potentially impact U.S. Treasury (UST) and mortgage-backed securities (MBS)<\/a> valuations<\/a>, but it appears as if the policymakers succeeded with its \u201cforward guidance\u201d on this front, and the focus has already turned to the next phase of the exit strategy: rate hikes<\/a>.<\/p>\n\n\n\n

Back to the Fed balance sheet for a moment to get some perspective on this pandemic-related round of quantitative easing (QE)<\/a>. As a reminder, the Fed\u2019s balance sheet is actually made up of more than just its UST and MBS holdings, and the actual component where QE shows up is its System Open Market Account<\/a>, or SOMA. During this QE4 operation, the Fed added more than $4.1 trillion to its UST and MBS holdings, more than doubling SOMA to $8.0 trillion. This was an enormous addition to the Fed\u2019s balance sheet and compares to total QE purchases of $3.25 trillion during the financial crisis-related tranches of QE.<\/p>\n\n\n\n

One final note on tapering before I turn to rate hikes. Keep in mind that the policymakers are reducing the size of future asset purchases, it is not ending them. Thus, QE4 is still alive and well; it is just operating at a scaled-back pace. If history is any guide, even when the Fed ends new purchases of UST and MBS, it will more than likely reinvest any maturing proceeds from its holdings, keeping SOMA flat at an elevated level, accordingly.<\/p>\n\n\n\n

On to rate hikes! Readers of my blog are fully aware that this aspect of the Fed\u2019s exit strategy is the one I\u2019ve been focusing on quite a bit. I\u2019m not alone. Not only has the 2\u20135-year sector of the UST market begun pricing in \u201cliftoff,\u201d but the Fed Funds<\/a> Futures arena has made a visible shift in this direction as well. In fact, the implied probability analysis factored in not just one rate hike for 2022, but two and a half increases. I know there\u2019s no such thing as half of a Fed Funds increase, but I think you get the picture here\u2014i.e., there is a growing perception the Fed may implement more than two rate hikes next year. In addition, the timing for the \u201cliftoff\u201d has been pushed up to next July. <\/p>\n\n\n\n

Conclusion<\/strong><\/h2>\n\n\n\n

As much as Chair Powell appears to be trying to de-link, if not outright downplay, rate hikes, the collective market, thus far anyway, hasn\u2019t been listening. It kind of reminds me of the whole \u201cinflation<\/a> is transitory\u201d argument to some extent, which, by the way, the Fed seems to be reluctantly admitting could mean up to a year, not just a month or two. Looking ahead, the bottom-line message is that monetary policy is likely embarking on the process of turning from a tailwind to a potential headwind for bond portfolios\u2026plan accordingly!<\/p>\n\n\n\n

—<\/p>\n\n\n\n

Originally Posted on November 3, 2021 – Fed Watch: Moving On\u2026and Rather Quickly<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

The Fed\u2019s announcement to begin tapering its balance sheet was a well-telegraphed development that, in and of itself, should not really have any meaningful impact on the money and bond markets. <\/p>\n","protected":false},"author":54,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[15,6,8,9,26,3],"tags":[446,9909],"contributors-categories":[13638],"class_list":{"0":"post-109886","1":"post","2":"type-post","3":"status-publish","4":"format-standard","6":"category-fixed-income","7":"category-north-america","8":"category-region","9":"category-securities","10":"category-text-articles","11":"category-traders-insight","12":"tag-federal-reserve","13":"tag-tapering","14":"contributors-categories-wisdomtree-u-s"},"pp_statuses_selecting_workflow":false,"pp_workflow_action":"current","pp_status_selection":"publish","acf":[],"yoast_head":"\nFed Watch: Moving On\u2026and 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