![]() Zoltan says that the RRP is becoming an " active tool that sucks the deposits away that banks decided to retain ”. However, T-Bills demand is crucial for future issuances. According to him, the sudden surge of RRP usage following the 5bps hike from the Federal Reserve implies that a large part of cash is rotating from bills to the RRP facility. Money market guru Zoltan Pozsar begins to be troubled about the growing size of the Fed’s Reverse Repurchasing Facility (RRP). Because T-Bills are already close to 0%, the Federal Reserve will soon need to decide whether to accept negative yields in the front part of the yield curve or to taper more aggressively than the market anticipates.Ĭoncerns regarding a spike in volatility are rapidly growing. We may be facing T-Bills paydowns (when the government issues less debt than what is maturing), which, combined with a reduction of the TGA, translates into lower yields in the front part of the yield curve. Regardless, US Treasury yields will most likely continue to trade rangebound until the Federal Reserve begins to engage more actively with tapering talks.Įxcess liquidity, the resumption of a debt ceiling limit, and the Treasury General Account drawdown will continue to squash US Treasury yields. Therefore, this week's minutes will be critical as they may give an idea of whether FOMC members are starting to be less confident about inflation's transitory nature and when the Fed could begin tapering its asset purchases. We believe it is clear that the central bank is shifting its focus from jobs to inflation pressures. The Federal Reserve hiked interest rates in two key money market facilities and opened up to tapering despite jobs numbers missed expectations for two months in a row. While the full employment vision has dominated monetary policies since the Covid-19 pandemic, the last FOMC meeting sent contradictory messages. Yet, we believe that investors are misreading the central bank message. Hence, the market expects the central bank to continue to remain accommodative. It’s clear that although the job market is recovering, we are still far away from the Fed’s full unemployment target. Wages increased the most since the Global Financial Crisis of 2008/09, but working hours fell. Jobs grew together with the unemployment rate. Friday’s strong nonfarm payrolls failed to revive the reflation trade as the report gave contradictory messages. While many of us are heading towards a well-deserved vacation, the market is yet to pack its bags. However, I will be returning at the end of the month for our regular monthly Fixed Income Update webinar. The week ahead will resume on the second half of August. I will finally go to Italy after more than a year of Danish confinement to get plenty of pasta, pizza and sun. Dear reader, this will be the last Fixed income the week ahead before the summer break.
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