The market is looking for clues from the Fed on whether it will adjust bond buying

US Treasury Secretary Steven Menuchin and Federal Reserve Chairman Jerome Powell have been seated to testify before the House Financial Services Committee under the supervision of the Treasury Department and the Federal Reserve’s Coronovirus Disease (COVID-19), Washington in the US Epidemic response on September 22 in Capitol Hill. , 2020.

Joshua Roberts | Reuters

The Federal Reserve may provide clues about its bond buying schedule when it releases its minutes on Wednesday, but the action the central bank took at its December meeting coincided with Janet Yellen’s expected nomination as Treasury Secretary. fell.

The minutes of the last meeting of the Fed are released at 2 pm on Wednesday afternoon. The Fed talked about possible ways to adjust the program in early November, so it may reveal some aspects of that discussion.

There was speculation in the market that the Fed would complete the bond purchase program in December by changing the period it is buying the bonds but puts the total treasury purchases at $ 80 billion per month. The theory is that if the Fed increases purchases of long-term treasuries, such as 10-year notes and 30-year bonds, that will maintain rates that affect mortgage and other loans from rising.

Mellon’s chief economist, Vincent Reinhart, said that apart from minutes a lot may not appear that changing the average duration of its purchase is just a possibility. “The news is not about minutes. On one level, there is going to be a natural disappointment,” he said. “We’ll probably get information about their intentions on asset purchases and whether it’s going to be based on more regulations.”

Yellen is expected to be nominated to the Treasury by President-Elect Joe Biden, and as a former Fed chief, an advocate for sympathy and financial encouragement for the Fed. Some market professionals expected the Fed to step into its bond program in December as Congress failed to approve more stimulus for the economy as the virus outbreak worsened. Some now say that the Fed could hold off on the bond program if it knows that Yellen is a strong advocate for other stimuli.

“I still think it’s a possibility. It’s a coin toss. It might be 60/40, but with [Yellen] Possibly being the Treasury Secretary, maybe a ‘Let’s see,’ “said Jim Caron, head of global macro strategies at Morgan Stanley Investment Management.

The yield of the 10% Treasury earlier this year, moving toward 1%, has led to lower trade based on speculation as the Fed will buy more Treasuries in that area. The 10-year yield was slightly above 0.88% on Tuesday.

The market is divided over whether the Fed will step in, but expectations rose last week after Treasury Secretary Steven Mnuchin informed the Fed that the Treasury would not expand some of the Fed’s emergency programs that would expire at the end of the year .

But strategists say Yellen will likely take steps to quickly restore those programs if the Fed believes those backstops are still needed. Among the facilities affected were the Fed’s programs for corporate debt and municipal debt.

Reinhart said, “The best metaphor is that Secretary Mnuchin strips down the railing he has put on him, and the end of the year is a sharp turn and it’s dangerous.” But he said that the Fed still has control of the programs that need to manage the year-end markets, like a repo operation.

He said that if the Fed moves on the bond program, it may not really have much effect. “You can find a 10-year Treasury as low as you want. They’ve got a full-fledged accommodation on the boil,” he said.

After the November meeting, Fed President Jerome Powell said the Fed had a “fruitful discussion” about the bond buying program, but felt it was effective and that the Fed was providing the right amount of housing.

The Fed is purchasing a total of $ 120 billion per month in its asset purchase program, including $ 40 billion in mortgage securities. If the Fed were to change its Treasury purchases, market professionals say it could buy about $ 10 billion at the long end of the curve.

Ian Linnegan, head of rate strategy at BMO, said Yellen’s nomination may not make much difference. “On the margin, I would say it may decide to follow up with the expansion of the weighted average maturity of treasury purchases. However, I don’t think it changes the calculus at the end of the day.” At this point I think the market thinks they do, “Linnegan said. He said the 10-year yield could return to 1% if the Fed does not increase the final purchase.

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