The market is underpricing the potential for President Trump to get more Fed cuts. Short term interest rate futures have consistently priced the trough of the cutting cycle at around 3%, regardless of Trump's aggressive demands or the weakening labor market. Market participants appear anchored to the median neutral rate of the Powell Fed even as there is significant reason to think the Trump Fed would have a different view. A 2.5% trough is a […]
A politicized Fed is unlikely to lead to higher yields because longer dated yields are becoming more connected to the expected path of Fed policy. Even without a new Chair, the Fed's party line has quietly shifted towards that of a productivity boom in line with the Administration. Powell's emphasis on employment and dismissal of inflation as transitory opens the door to deep cuts next year. Regulatory changes are tightening arbitrage relationships between Treasuries and […]
The Administration is showing its hand in its efforts to control the Fed, and they are likely to have more success than the market anticipates. Long-time Trump advisor Kevin Hassett looks to be Fed Chair, and the Administration is floating ways to have more influence over the selection of regional Fed presidents. The efforts to dismiss Governor Cook continue with a Supreme Court hearing in January. There is enough fuzziness in monetary policy such that […]
The biggest market impact of the Fed's balance sheet normalization may not be in the Treasury market, but in the corporate bond market. The QE programs shrank the privately available supply of safe assets and successfully pushed investors into riskier investments. The historical anomaly of the policy was not in its Treasury holdings, but in owning around 20% of the entire Agency MBS market. Many traditional Agency MBS investors responded by shifting towards higher yielding […]
The shock in equity markets last week is more likely a correction than a trend change as the trajectory of monetary and fiscal policy is turning increasingly accommodative. The Fed looks to cut rates this December as well as resume its balance sheet expansion to dampen repo rate volatility. Trump has been moderating his policy stances in response to poor poll numbers, and looks to exercise all executive influence to stimulate the economy ahead of […]
The Treasury market has defied expectations and performed well this year as investor behavior is little changed and as the U.S. Treasury adapted to investor demand. The large fiscal deficit, elevated political uncertainty, and potential loss of monetary policy independence that concerned investors earlier appear forgotten. Retail flows into bond funds remain strong, with October even seeing the strongest inflows since 2021. The increase in bond fund assets also contributed to further growth of the […]
