There’s some good news for Treasury traders suffering from the Fed rate waiting game

For bond traders languishing in the waiting game on Fed rate policy, there could soon be some welcome support.

For bond traders languishing in the waiting game on Fed interest rate policy, there could soon be some welcome support.
Starting on Wednesday, and for the first time since the early 2000s, the U.S. Treasury Department will launch a series of repurchases of old and difficult-to-trade bonds. Then in June, the Fed is expected to begin slowing the pace of its balance sheet reduction.
Both moves will provide support for the U.S. Treasury market. Faced with continued U.S. economic growth and unexpectedly sticky inflation, investors have fundamentally recalibrated their expectations for interest rate cuts.
The U.S. Treasury market has stabilized significantly after experiencing some volatility. The government\’s efforts should help improve trading capabilities.
Buybacks will be beneficial. And they will be a good support, said Jay Barry, co-head of U.S. rates strategy at JPMorgan Chase.
He said that the Fed\’s slowdown in quantitative tightening would be beneficial because it is a prudent management of risks. It should alleviate market concerns about a repeat of the overnight capital market crisis in 2019.
U.S. Treasury bond yields have fallen since early May. The Bloomberg index shows that the monthly increase in U.S. Treasury bonds is heading towards 1.4%.
The U.S. 2-year Treasury yield closed last week at around 4.95%, close to the high end of this month\’s range of 4.7%-5.03%. It reflected mixed data and signals from several Federal Reserve officials that they are prepared to keep interest rates high for longer.
While some central bank officials have even signaled their intention to tighten policy further if necessary, derivatives markets view this as unlikely, which could help prevent bond yields from rising.
The U.S. swap contracts currently show that the Federal Reserve is expected to cut interest rates by about 32 basis points throughout 2024. This reflects that the market expects a 25 basis point interest rate cut to be a certainty.
U.S. markets were closed Monday for Memorial Day.
Two days later, the Ministry of Finance will start bond repurchases.
Through a series of weekly operations expected until the end of July, the Treasury will purchase some existing government bonds, purchase old bonds and eventually replace them with larger-scale cash bonds. The purpose of this is to improve transaction convenience. Because of the larger Older securities are generally the least liquid.
The liquidity of the U.S. Treasury market has been challenged many times in recent years. The situation has improved since this year.
A JPMorgan measure of liquidity has improved to its best level since the start of Fed tightening in early 2022. However, it is still about 45% below the 10-year average.
Calm down The prospect that the Federal Reserve will slow down the pace of balance sheet reduction starting in June also provides support to the bond market.
The Federal Reserve will lower the monthly limit on the number of U.S. Treasury securities that will not be reinvested after maturity from $60 billion to $25 billion. The cap on mortgage-backed securities (MBS) will remain unchanged at $35 billion.
With the Fed expected to stay on hold and wait for high interest rates to eventually slow the economy, the bond market is moving into a range. The ICE Bank of America MOVE Index – a gauge of bond volatility that tracks expected moves in U.S. Treasury yields based on options – has fallen to The lowest since February 2022.
MOVE\’s losses widened in the past week. The index posted its longest losing streak since June 2023 after April consumer price data showed core inflation slowed.

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