We are a bit surprised the market has not moved more on the Fed’s firm preference for a holding pattern on rates. As far as the market discount is concerned, there’s still near a 50% probability attached to a cut in March. This must change. We still think this should be in the 35% area, in terms of probability for a cut for March. And as it moves there, it can pressure the 10yr yield back above 4%, and it should stay above for a bit. The refunding story this morning has a bottom line narrative of heavy supply. There is too much talk there on silver linings. Bottom line it’s heavy. And now we see the Fed is not cutting. At least not yet. As that gets factored in its tough to see market rates ratcheting lower here. The NY Community Bancorp story also looks isolated, so far, and so not systemic. Bottom line we see pressure for yields to edge higher on a multi-week view. Not happening so far, but that’s the view.
This was the FOMC meeting from which some big decisions on quantitative tightening (QT) tapering was mooted to be made. We’ve been of the consistent opinion that the runway the Fed is on in terms of QT is perfectly fine. The Fed can continue to do the $95bn per month for at least the coming 5 months, and after that it could either continue at this pace for another 6 months and then stop, or it could taper if it chooses to. Either way the Fed have time, and that appears to be the way it has approached it at this meeting. It seems the market got too attached to commentary on telegraphing QT intentions from the previous FOMC minutes. This was no more than an early prudent discussion, and not a significant telegraphing event. This Fed is on a holding pattern here too, maintaining the QT at its current pace. We view that as perfectly fine at this juncture.
