Yes, inflation expectation have been roaring lately marked by the 1oY breakevens touching the amazing 2.0%. Worries over inflation run roughly parallel with concerns that the Fed will tighten policy sooner than expected.
Minutes of the Federal Open Market Committee December 15–16, 2020
The markets were focused on discussion surrounding the Fed’s asset purchase program. Currently, the central bank has been buying at least $120 billion in treasuries and mortgage-backed securities each month. As expectation for higher inflation is in place, markets were looking for signals whether and when the Fed would change in the pace of purchases.
As the December minutes showed,
“Once such progress had been attained, a gradual tapering of purchases could begin and the process thereafter could generally follow a sequence similar to the one implemented during the large-scale purchase program in 2013 and 2014.”
Though the committee voted to keep the current buying pace until it sees “substantial further progress” towards its goals regarding inflation and employment. It’s worth remembering that the last time the Fed cut back on its asset purchases in 2013, it triggered a “taper tantrum” in the market, sending the 10-year yield rising around 140 basis points in the span of four months. There is a good reason that the officials would do what they can to avoid it this time, which I believe is exactly what they are doing now, beginning to lay the groundwork for a taper, managing exceptions.
The treasury markets sure sensed it.
BTW, You know when’s the best time to short Bitcoin? 😉
Update on Jan.12th,
In the week, Fed’s Raphael Bostic said that he would be open to beginning the wind down of purchases as early as the end of 2021, which contributed at least on the margin to 10-year yields run up to that 1.19 level.
But here was also offsetting comments from Vice Chair Clarida, who noted that the size and composition of QE is going to remain stable throughout the year. That corresponded with when rates peaked and a bit of flattening start to re-emerge in the Treasury market.
Note to Self:
Since August, in speaking of real rates, I felt there have been a lot more uncertainties than I could imagine, fiscal stimulus, fed’s policy, presidency election, vaccine development…To be perfect honest, it’s exhausting and I know there is a little piece of me that just wanted to complain and kept questioning whether the decision to trade at high levels and in times of uncertainty was wise. It has been pointed out by a friend who I see as a mentor, that I started with a highly certain trend, captured the opportunity perfectly, true, but in fact the case was rare as well. Now it’s just about time to move on and adapt to the tremendous uncertainties with a more dynamic mindset. Touche. Isn’t the reality always the most complicated? Isn’t the future always full of uncertainties?
2021, a brand new year, maybe a new chapter of my learning journey too?
All About Macros 