The Daily Update - Fed Fireworks Night

The US Treasury (UST) market rallied strongly last night as the ‘patient’ Fed signalled almost a summer of ‘hibernation’ as its new interest rate posture. Eleven of seventeen officials saw no further rate hikes this year from their previous stance of 2 hikes and the odds in the market of the next move being a cut moved from 30% to 50%, in line with our long standing expectations.

The Fed chair, Powell, after the conclusion of the two day meeting said ’Our policy rate is in the range of neutral, the economy is growing at about trend, inflation is close to target, unemployment is under 4%. It’s a good time for us to be patient and watch and wait and see how things evolve.’

The Fed also signalled that the balance sheet runoff will conclude in September when they estimate that their balance will be a bit above $3.5 trillion. Starting in October, up to $20 billion in maturing agency mortgage-backed securities will be reinvested in UST securities across a range of maturities making it the first time in years that the Fed will actually be investing in bills as well as longer-term assets.

The largest move in the UST market was seen at the five-year maturity which fell 9.5bp to a yield of 2.32% and is now trading 7bp through the two year maturity at 2.39%. The curve bull steepened with the 30 year falling just 5bp although it was the best performer in terms of price movement followed by the ten-year maturity. Our credits have also kept pace with these moves with our ten-year maturities up between 0.75 of a point to a point and longer dates up around 1.5 points across our holdings.

We now await the Bank of England announcement at 12 noon where not even a ‘fizzle’ is expected following last night’s Fed fireworks.

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