On Monday (January 8th), unlike the heavy selling pressure on the US Treasury market in the first week of the new year, although the market's expectations for the Fed's March rate cut continued to cool, this time the US Treasury market unexpectedly performed relatively strongly, with multiple maturities of US Treasury yields falling from last week's highs, rarely reversing the betting trend in the interest rate market
Market data shows that as of the end of the New York session, the yield of the 2-year US Treasury bond fell 0.6 basis points to 4.383%, the yield of the 5-year US Treasury bond fell 1.9 basis points to 3.992%, the yield of the 10-year US Treasury bond fell 1.6 basis points to 4.033%, and the yield of the 30-year US Treasury bond fell 1.1 basis points to 4.194%.
Overall, although the overnight decline in US Treasury yields across different maturities was generally not significant, the downward trend on that day was still extremely rare - as expectations for the Fed's March rate cut continued to cool on Monday as several Fed officials expressed their unwillingness to cut rates quickly. In other words, the bets in the interest rate swap market continued to turn hawkish at the beginning of the new year, but the trend of US Treasury yields showed an unusual dovish side last night.
Many industry insiders have also turned their attention to a sensitive topic recently mentioned by more and more investment banking institutions and Federal Reserve officials, which is when the Federal Reserve will exit balance sheet reduction.
As the Federal Reserve gradually starts to release the signal that it is expected to slow down the pace of the scale contraction, market participants are eager to determine the end time of the quantitative tightening policy, which has strengthened many investors' expectations for the strong performance of US treasury bond bonds this year.
From the comments of central bank officials, speculation that the Federal Reserve is expected to slow down its pace of "balance sheet reduction" has been almost completely ignited after the latest speech by Dallas Fed Chairman Logan last Saturday - Logan said at the time that the Federal Reserve may need to slow down its pace of reducing its balance sheet in the context of tightening liquidity in financial markets.
As a former senior official in the market department of the New York Federal Reserve, Logan's call to consider slowing down the pace of balance sheet tightening is authoritative.
She said that although liquidity and bank reserves in the financial system are still very sufficient, some banks may start to experience liquidity constraints, especially as the use of overnight reverse repurchase agreements by the Federal Reserve decreases. Logan therefore believes that it is "appropriate" to start discussing the indicator parameters for the Federal Reserve's decision to slow down its balance sheet contraction.
The December meeting minutes released by the Federal Reserve last week also showed that some policymakers hope to discuss the revision of the quantitative tightening (QT) plan.
"This is good news for the bond market. The end of quantitative easing policy will dispel the concerns of investors holding cash who were previously unsure whether they should enter the bond market," said Bob Michele, Chief Investment Officer and Global FICC Head at JPMorgan Asset Management
Is the investment bank expected to announce it as soon as March?
Currently, Bank of America strategists Mark Cabana, Katie Craig, and economist Michael Gapen have predicted in a recent report that the Federal Reserve will announce a slowdown in its balance sheet reduction plan for US Treasury bonds in March, in sync with the first interest rate cut.
The Bank of America expects that the Federal Reserve will officially slow down the pace of shrinking its balance sheet from April to reduce the ceiling of shrinking its balance sheet for US treasury bond bonds by $15 billion a month - that is, to $45 billion in April, to $30 billion in May, to $15 billion in June, and to end completely in July.
At present, the upper limit of the scale reduction of the Federal Reserve is US $60 billion of US treasury bond bonds and US $35 billion of institutional mortgage-backed securities (MBS) per month - the actual scale reduction of MBS is far lower than this figure.
Coincidentally, strategists at Barclays Bank currently anticipate that the Federal Reserve may begin to slow down its balance sheet tightening plan in April and end it by mid summer.
By contrast, Deutsche Bank expects its balance sheet reduction to begin in June, while Morgan Stanley's forecast is relatively later - the bank believes that Federal Reserve policymakers want to give the market sufficient preparation time and therefore will not take action before September.
Gennady Goldberg, head of US interest rate strategy at Dao Ming Securities, pointed out that the biggest issue with slowing balance sheet contraction is timing. Daoming Securities predicts that the Federal Reserve will stop shrinking its balance sheet in June.
Undoubtedly, if the Federal Reserve can withdraw from balance sheet tightening as soon as possible, it would be beneficial for the market to alleviate liquidity pressure. At the end of last year, the high volatility of benchmark interest rates in the financing market, such as the guaranteed overnight financing rate (SOFR), which soared to record levels, raised concerns among some traders that a "money shortage" may resurface. Meanwhile, the usage of the Federal Reserve's overnight reverse repurchase tool has rapidly shrunk to about $720 billion at the beginning of the new year.
"This will reduce the volatility of the interest rate market," said Rick Rieder, Chief Investment Officer of BlackRock's Global Fixed Income Business. "One of the risks this year is the large bond auctions that the US Treasury Department must execute. When you have to conduct such a large-scale auction while the Federal Reserve is implementing quantitative tightening, there is a risk. This (slowing down balance sheet tightening) reduces some of these risks."
EY Chief Economist Gregory Daco pointed out, "As the Federal Reserve is about to shift from a historic tightening cycle, people want to avoid any form of liquidity pressure, and we know these turning points are often sensitive moments in the market."
Ending quantitative tightening policies ahead of schedule can also avoid concerns about the 2019 repo market crisis, when overnight market interest rates surged fourfold to 10%, forcing the Federal Reserve to take emergency intervention measures. Mike de Pass, global interest rate trader at Citadel Securities, said, "This indicates that the Federal Reserve wants to act cautiously, but equally important, they need to remember how bad the outcome was last time."