U.S. quantitative easing policy update

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The imminent tightening of the supply of new U.S. government bonds has lowered expectations that the Fed’s withdrawal from the crisis-period stimulus program may push down U.S. Treasury bond prices.

Investors bought $126 billion in new Treasury bonds in three auctions this week, the latest sign of strong demand for top-tier bonds.The strong performance came after the Ministry of Finance indicated that it might begin to reduce its Bond sale In November of this year, it was reduced for the first time in five years because the demand for funds for the stimulus program has eased.

These developments are expected to bring tailwinds to the Treasury bond market and depress yields. That was when the Fed was weighing when to start “shrinking” its bond purchases, and many analysts expected this to push yields in the opposite direction.

The level of U.S. bond yields is critical to the U.S. and global economy because they determine the borrowing costs of a wide range of assets, and lower yields are considered to be more adaptable to growth than higher yields.

Greg Peters, head of fixed income multi-sector and strategy at PGIM, said: “Supply is a big thing no one talks about.” “Fundamentals eventually pushed things forward, but I do think that there is insufficient supply… [Fed] The taper is a bit irrelevant. “

As Labor market recovery From the epidemic and Rising inflation At the fastest rate in 13 years, the Fed has begun to discuss when it might start to cut bond purchases.

Vice Chairman Richard Clarida said last week that he would Support for diminishing announcements If the economy continues to develop as expected this year. Without the Fed as a buyer, the amount of Treasury bonds available to investors will usually increase, but if the issuance is reduced at the same time, this may not be the case.

The appeal of U.S. government bonds has been strengthened because it provides positive returns, and in a world with little default risk, most top bonds of $16 trillion are traded at negative yields. Investors who buy bonds with negative yields are guaranteed to lose money if they hold them to maturity.

In the 10-year U.S. Treasury bond auction this Wednesday showed a strong appetite. Primary dealers and large financial companies must absorb any supply without buying other bidders. The percentage of purchases is the smallest on record. The indirect bidder-the agent of the foreign buyer-received 77% of the offering, valued at approximately US$32 billion.

It’s not just foreign investors: the average demand for 10-year bond auctions this year is the highest level since 2014. The next supply test is on Wednesday, when the United States will auction $27 billion in new 20-year bonds.

“Global liquidity is huge. NatWest Markets’ director of strategy John Briggs said that this will definitely limit the long-term yields in the United States, or just put pressure on their future.