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March 18, 2021

Fed does not want to control long term yield curve NOW

Reading time:4 min

On Wednesday, March 18, 2021, the US Federal Reserve had a “meeting.” The market had high expectations as long-term US bond yields continued to grow, given the expected economic recovery and rising inflation expectations.

FED is extrelemy dovish

On Wednesday, March 18, 2021, the US Federal Reserve had a “meeting.” The market had high expectations as long-term US bond yields continued to grow, given the expected economic recovery and rising inflation expectations. In any case, high yields cause the debt to be more expensive. This can be a problem for companies with a deteriorating financial position or for “startups” that show optimistic growth but still operate at a loss. The market was tense whether fed would ease monetary policy, even more, thereby reducing the cost of debt or adapting to a market that priced in fed funds increase in the future. However, we need to mention that fed is not buying US long-term debt in extreme ways yet; it targets the short-term curve right now.

Fed and “dot-plot” prognosis

The fed increased its volume through overnight reverse repo operations from $30 billion to $80 billion. According to Tavi Costa, the fed has increased the volume of asset purchases in recent weeks. This step should again raise inflation expectations.

Fed purche of treasuries
Source: Tavi Costa (Crescat Capital LLC). Federal Reserve

On the following so-called “Dot-plot” chart, we can see how the fed decides to increase rates in the future. The number of points represents the number of votes of individual members who are entitled to vote. No US rate hike is expected this year. The vote partially reassured investors. On the other hand, significant changes need to be noted. At the previous Fed meeting, only one member of the commission voted to raise rates in 2022. As of March 17, 2020, there were already four members. On the left axis, we can see what change rates are leaning towards. In 2023, a more significant increase in rates to higher levels is expected. In our opinion, as we stated in December 2020, we expect a slight increase in rates in 2022, around the second half.

default
Source: Zerohedge. Federal Reserve.

The head of the Fed, Powell, once again announced that the bond market’s current yields are not putting them in an uncomfortable position. In doing so, they clearly declared that to some “turning point,” they would still accept an increase in yields on the bond market. After strong monetary and fiscal stimulus (a check of $ 1.9 trillion in March), we expect the economic recovery to come faster. We also expect significantly higher inflation in the US and an increase in employment. In this case, this may mean that bond yields may continue to rise due to a faster economic recovery and higher inflation. If we get to this point, it is clear that the fed will reconsider its monetary policy. In conclusion, we only remind you that higher yields have a negative impact on the growth of the price of precious metals and shares mostly with higher debt - the technology sector.

US 10year government bond yield.
Source: Tradingview.

However, we still consider yields growth to be limited. It should not be forgotten that higher bond yields = more expensive debt. In previous years we should see a similar pattern in yields. Every time it has been stopped, and the trend continued to lower. With the current monetary situation, we highly doubt about breaking previous highs from 2020. This could be seen if we had a massive inflation rally in 2021/2022.

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Walfir Technologies
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WALFIR Technologies is one of the three divisions of WALFIR s.r.o., which is based in Slovakia. The primary interests of this division are analytical, quantitative, and algorithmic systems. The core of the team (Lubos Snirc and Patrik Mackovych) is involved in the Investro project. Both have experiences in global financial and investment analytics and their articles and analyzes can be found on major financial news portals.

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