Will the narrative begin to rise about the amount of Treasuries the Fed will let roll off its balance sheet? As noted yesterday, the Committee indicated it will let $5 billion roll off its balance sheet versus $25 billion.
FRB Chair Powell stated the reason for this course of action was related to federal debt ceiling complications. To the surprise of the more astute Fed observers, Powell gave no indication QT would re-accelerate after Congress addresses the debt limit, which is expected later this year.
Is the Fed concerned about “limited absorption capacity in the markets for long term bonds?” Former Treasury Secretary Larry Summers is “greatly alarmed” about this decision to dramatically slow down the shrinkage of its Treasury holdings stating “this should be getting more people’s attention about this disconcerting development.”
Summers further stated the Fed may be worried about similar situation as to what happened in September 2022 when UK Prime Minister Liz Truss’s government triggered a sovereign debt crisis with plans for an unfunded tax cut. The Bank of England had to step into the bond market to avert a meltdown.
It is not sensational to write that uncertainty is rising. Most will agree the underlying environment is dramatically changing, the outcome of which may be unquantifiable.
Commenting on yesterday’s market activity, uncertainties rose again around the impact of a trade war, concerns that outweighed the latest hosing and jobs data showing the economy is still “quite strong.”
Treasuries were relatively unchanged. After an early morning advance, equities ended nominally lower with the NASDAQ down about 0.4% and the Dow unchanged.
Last night the foreign markets were down. London was down 0.48%, Paris down 0.59% and Frankfurt down 0.58%. China was down 1.29%, Japan down 0.20% and Hang Seng down 2.19%.
Futures are down about 0.25% on economic and tariff uncertainty. Today is option expiration day where over $4 trillion in options, derivatives and futures expire. Will there be periods of intense volatility or has most of the positions already been unwound? The 10-year is up 6/32 to yield 4.21%.
