Fixed Income came back into the limelight in September as the once sleepy Treasury markets woke up to a hawkish Fed. FOMC speakers were out in force in September trying to make a case for a reduction or 'taper' in the USD 120 bn worth of securities the Fed is currently purchasing every month. These include USD 80 bn of government debt and USD 40 bn of Mortgage-backed securities (MBS). A popular criticism of the Fed recently has been the outsized role played by the Govt in the Money Markets, especially after the strong stimulus response to the selloff in March 2020, and this would essentially look to reduce that influence as the economy gets back on a stronger footing.
In a series of speeches, culminating in the recent FOMC meeting in the second half of the month, most FOMC members believe that significant progress on their dual mandate of employment and price stability was close to reality. While the recent supply-side constraints have led to a run-up in prices and are evident for all to see, the labor markets gains have been progressing well too as the economy looks to slowly add back all the jobs lost in Q2 2020. The market received the news of tightening well and there were no signs of a 'tantrum' as would has been the case for similar attempts historically.
The US Treasury yield curve got steeper with the 10Y now back at the 1.5% level. While the S&P 500 was down 2% on the month, it did trade higher around the time of the FOMC meeting. Concerns remain around the leverage in the system, particularly with the Evergrande saga drawing attention to US High Yield bond spreads at multi-year lows. Congress' agenda over the coming months is a cause for uncertainty too with partisanship as high as ever and the possibility of a US default looming large. However, our baseline here is for the positive risk sentiment to continue, with the Fed to start tapering in the next couple of months and both parties in the US reaching a compromise to avoid a catastrophic default, while potentially passing the bipartisan infrastructure bill and the expansionary budget bill currently being debated.
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October 19, 2021
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