The Federal Reserve decision to start to shrink its balance sheet is expected to have a material influence on asset markets over time. Yet the bond market seems largely to have shrugged it off.
In late July, the Fed warned the market that the balance sheet deduction would begin “relatively soon,” which was quickly translated into the next meeting, the two-day meeting ending Sept. 20.
TimeU.S. 10 Year Treasury NoteNov 16Jan 17Mar 17May 17Jul 17Sep 17
BX:TMUBMUSD10Y
1.50%1.75%2.00%2.25%2.50%2.75%
Since then, yields on the 10-year Treasury note have sunk from 2.285% to 2.191% Thursday. The 2-year note was at 1.355% on July 26 compared with 1.368% Thursday.
What gives?
Economists caution against jumping to the conclusion that the response so far in the markets proves the balance sheet unwind effect is a non-issue, seeing several offsetting developments at work.
First, the Fed is taking baby steps. The plan that has been laid out calls for the balance sheet to initially shrink by only $10 billion per month...
Read more at:
http://www.marketwatch.com/story/why-the-bond-market-isnt-freaking-out-from-the-feds-shift-to-quantitative-tightening-2017-09-14
