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An exciting end to the week on the markets. Part 2.

Zdjęcie autora: Jarosław JamkaJarosław Jamka

Much more interesting things are happening on the rates/bonds side, with higher inflation readings losing out to weaker economic data and the mention of increased purchases of short-term T-bills by the Fed (financed by selling MBS holdings to zero).


Could higher inflation not be so terrifying? See Figure 1.



FED's Waller "made a round trip".. on February 23 was quite hawkish and 10Y yields then touched 4.35% - and on March 1 he mentioned increasing purchases of short-term T-bills - and yields ended the day at 4.18%.


Waller on increasing T-bills purchases:

“Thinking about longer-term issues related to the Fed’s portfolio, I want to mention two things. First, I would like to see the Fed’s agency MBS holdings go to zero. (…)

Second, I would like to see a shift in Treasury holdings toward a larger share of shorter-dated Treasury securities. Prior to the Global Financial Crisis, we held approximately one-third of our portfolio in Treasury bills. Today, bills are less than 5 percent of our Treasury holdings and less than 3 percent of our total securities holdings. Moving toward more Treasury bills would shift the maturity structure more toward our policy rate—the overnight federal funds rate—and allow our income and expenses to rise and fall together as the FOMC increases and cuts the target range. This approach could also assist a future asset purchase program because we could let the short-term securities roll off the portfolio and not increase the balance sheet.”


A decrease in ISM Manufacturing by 1.3 points to 47.8 - plus a drop in construction spending in January (by 0.2% MoM, 1st negative monthly print since Dec-2022) lowered the Atlanta GDP tracker growth forecast in Q1 2024 from 2.95% to 2.12% - see Figure 2.


A very interesting net effect... we are currently at the 10Y UST yield only 2bps above the yield immediately before the publication of red hot January CPI inflation data (February 13).



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