$US10Y Breaking Out OF 40 Year Trend
Historically, in the absence of QE (Quantitative Easing), the US10Y (US 10 Year Treasury Bon) exceeds inflation. This means that bond yields must rise to exceed inflation for non-Federal Reserve buyers to enter the market place. Non-Government buyers will not buy a bond below inflation as their real returns would be negative.
A SIGNIFICANT CONCERNS/CONSIDERATIONS:
How The Fed May Reduce The Balance Sheet:
- If they flood the market, we could see a squeeze on the bond market as the FED represented 2/3 of the bond market prior to ending their aggressive purchasing of bonds last week.
How The New "Standing Repo Facility (S.R.F)" Will Effect The Bond Market:
- Unclear, as it is untested in this Quantitative Tightening (QT) climate.
- The premise is that the S.R.F is a tool that FED now has to avoid what happened in 2019. The goal is to help prevent a spike in bond yields.
Explanation from Federal reserve website:
federalreserve.gov/monetarypolicy/standing-overnight-repurchase-agreement-facility.htm
"When the Federal Reserve conducts an overnight repo, it buys a security from an eligible counterparty and simultaneously agrees to sell the security back the next day. The difference between the purchase price and the sale price of the securities implies a rate of interest earned by the Federal Reserve on the transaction. The FOMC sets the S.R.F minimum bid rate, which is the minimum interest rate the Federal Reserve is willing to receive in an S.R.F operation; if the amount of bids exceeds the operation limit, the actual interest rate that a counterparty pays is determined through an auction process. The securities accepted in S.R.F operations include Treasury securities, agency debt securities, and agency mortgage backed securities."
A SIGNIFICANT CONCERNS/CONSIDERATIONS:
How The Fed May Reduce The Balance Sheet:
- If they flood the market, we could see a squeeze on the bond market as the FED represented 2/3 of the bond market prior to ending their aggressive purchasing of bonds last week.
How The New "Standing Repo Facility (S.R.F)" Will Effect The Bond Market:
- Unclear, as it is untested in this Quantitative Tightening (QT) climate.
- The premise is that the S.R.F is a tool that FED now has to avoid what happened in 2019. The goal is to help prevent a spike in bond yields.
Explanation from Federal reserve website:
federalreserve.gov/monetarypolicy/standing-overnight-repurchase-agreement-facility.htm
"When the Federal Reserve conducts an overnight repo, it buys a security from an eligible counterparty and simultaneously agrees to sell the security back the next day. The difference between the purchase price and the sale price of the securities implies a rate of interest earned by the Federal Reserve on the transaction. The FOMC sets the S.R.F minimum bid rate, which is the minimum interest rate the Federal Reserve is willing to receive in an S.R.F operation; if the amount of bids exceeds the operation limit, the actual interest rate that a counterparty pays is determined through an auction process. The securities accepted in S.R.F operations include Treasury securities, agency debt securities, and agency mortgage backed securities."
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