Treasury Yields Slump After Fed Minutes Show Balance Sheet Talk — BOND REPORT

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Goldman Sachs sees the announcement of balance sheet adjustment as "a smaller tightening step" than the Fed's typical 25-basis-point rate hike, Goldman's chief USA economist, Jan Hatzius, explained recently.

The Fed also provided some details on how it could taper back its balance sheet, an expected move that would include a steady increase in the level of securities it would roll off each month. Under the proposed approach, the Committee would announce a set of gradually increasing caps, or limits, on the dollar amounts of Treasury and agency securities that would be allowed to run off each month, and only the amounts of securities repayments that exceeded the caps would be reinvested each month.

"Gold could face more pain if tonight's [Federal open market committee] minutes show that the Fed is on course for two to three more rate hikes this year", said Jeffrey Halley, a senior market analyst at Oanda.

Eight of the 11 major S&P 500 sectors were higher, led by the utilities index's .SPLRCU 0.49 percent rise. The central bank lifted rates at its meeting in March, but then voted unanimously in May to leave its target interest rate unchanged at a range of 0.75 percent to 1 percent.

But after the minutes were released, Treasury values rose and longer-term yields fell. After 3 p.m., the 2-year note fell a further 3 basis points to 1.270%.

The Federal Reserve kept interest rates near zero from late 2008 to late 2016.

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While recent economic data has been mixed with signs of a dip in consumer sentiment and spending, the job market continues to strengthen, which could the Fed impetus to continue with its path of monetary tightening.

Mulvaney's comments during a House Budget Committee hearing resurrected an issue that Congress has mostly ignored in recent months but that will soon force some tough political decisions.

The S&P 500 index showed 22 new 52-week highs and eight new lows, while the Nasdaq recorded 36 new highs and 21 new lows. It had been hovering just above its 6-/12 month lows as investors shifted from USA politics to monetary policy. These statements could be viewed as slightly more dovish, yet CME Fedwatch is still showing the current probability for a June rate-hike at 83.1 percent.

The dollar was 0.1 percent higher at 111.85 yen after a bounce to 112.050 yen, its highest in a week.

"Any combination of the above is most likely bullish for the US dollar, especially as post a June hike, the market has not priced this possibility in on its forward indicators".

The ratings agency - which also changed its outlook on China to stable from negative - said the downgrade reflects expectations that the country's financial strength would "erode somewhat over the coming years".

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