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Could both bond and stocks decline at the same time?

Quantitative Tightening?

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#1 Geomean

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Posted 29 September 2017 - 09:44 AM

Will quantitative tightening have the opposite effect on markets as Quantitative Easing?  This is a very pertinent question at the moment.

 

By way of background, here's the Policy Announcement on it's balance sheet reduction that starts next week.   https://www.federalr...ry20170614c.htm

 

Basically Quantitative Tightening starts at 10 billion per month and increases to 30 billion per month over time.  Significantly it will not only reduce the Fed's holdings, but also the amount of securities available to borrow from the Fed, a monetary / liquidity expansion mechanism that has exploded in scope over the last two years (the Fed is making it's security's holdings available to borrow and for re-hypothecation by banks and big dealers.)  Some who track this say the Fed's daily operations has been a key to predicting short term market moves

 

Here's the Fed Statement on reducing it's balance sheet. 

 

"Effective in October 2017, the Committee directs the Desk to roll over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing during each calendar month that exceeds $6 billion, and to reinvest in agency mortgage-backed securities the amount of principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during each calendar month that exceeds $4 billion. Small deviations from these amounts for operational reasons are acceptable."

 

It's been a little hard to judge how the stock and bond markets might react to the Fed's balance sheet reduction. Here's a sample discussion of the process for and the reaction so far. http://www.investope...-balance-sheet/

 

However, if anyone has found any cogent articles, videos, interviews, etc on the macro impact of the Fed's Quantitative Tightening to help get a good fix on the macro impact it might be helpful to share those.

 

My contribution would be  Shane Smoley's interview ( who follows this closely) on Larry Pesavento''s show on TFNN.com yesterday was very adamant that the balance sheet reduction will have a significant impact.  @ 25 min mark at https://www.youtube....E&v=whqhF2kutPQ

 

ATB

Geo


Edited by Geomean, 29 September 2017 - 09:52 AM.

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#2 da_cheif

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Posted 29 September 2017 - 10:32 AM

in the

 

Will quantitative tightening have the opposite effect on markets as Quantitative Easing?  This is a very pertinent question at the moment.

 

By way of background, here's the Policy Announcement on it's balance sheet reduction that starts next week.   https://www.federalr...ry20170614c.htm

 

Basically Quantitative Tightening starts at 10 billion per month and increases to 30 billion per month over time.  Significantly it will not only reduce the Fed's holdings, but also the amount of securities available to borrow from the Fed, a monetary / liquidity expansion mechanism that has exploded in scope over the last two years (the Fed is making it's security's holdings available to borrow and for re-hypothecation by banks and big dealers.)  Some who track this say the Fed's daily operations has been a key to predicting short term market moves

 

Here's the Fed Statement on reducing it's balance sheet. 

 

"Effective in October 2017, the Committee directs the Desk to roll over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing during each calendar month that exceeds $6 billion, and to reinvest in agency mortgage-backed securities the amount of principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during each calendar month that exceeds $4 billion. Small deviations from these amounts for operational reasons are acceptable."

 

It's been a little hard to judge how the stock and bond markets might react to the Fed's balance sheet reduction. Here's a sample discussion of the process for and the reaction so far. http://www.investope...-balance-sheet/

 

However, if anyone has found any cogent articles, videos, interviews, etc on the macro impact of the Fed's Quantitative Tightening to help get a good fix on the macro impact it might be helpful to share those.

 

My contribution would be  Shane Smoley's interview ( who follows this closely) on Larry Pesavento''s show on TFNN.com yesterday was very adamant that the balance sheet reduction will have a significant impact.  @ 25 min mark at https://www.youtube....E&v=whqhF2kutPQ

 

ATB

Geo

 

Will quantitative tightening have the opposite effect on markets as Quantitative Easing?  This is a very pertinent question at the moment.

 

By way of background, here's the Policy Announcement on it's balance sheet reduction that starts next week.   https://www.federalr...ry20170614c.htm

 

Basically Quantitative Tightening starts at 10 billion per month and increases to 30 billion per month over time.  Significantly it will not only reduce the Fed's holdings, but also the amount of securities available to borrow from the Fed, a monetary / liquidity expansion mechanism that has exploded in scope over the last two years (the Fed is making it's security's holdings available to borrow and for re-hypothecation by banks and big dealers.)  Some who track this say the Fed's daily operations has been a key to predicting short term market moves

 

Here's the Fed Statement on reducing it's balance sheet. 

 

"Effective in October 2017, the Committee directs the Desk to roll over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing during each calendar month that exceeds $6 billion, and to reinvest in agency mortgage-backed securities the amount of principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during each calendar month that exceeds $4 billion. Small deviations from these amounts for operational reasons are acceptable."

 

It's been a little hard to judge how the stock and bond markets might react to the Fed's balance sheet reduction. Here's a sample discussion of the process for and the reaction so far. http://www.investope...-balance-sheet/

 

However, if anyone has found any cogent articles, videos, interviews, etc on the macro impact of the Fed's Quantitative Tightening to help get a good fix on the macro impact it might be helpful to share those.

 

My contribution would be  Shane Smoley's interview ( who follows this closely) on Larry Pesavento''s show on TFNN.com yesterday was very adamant that the balance sheet reduction will have a significant impact.  @ 25 min mark at https://www.youtube....E&v=whqhF2kutPQ

 

ATB

Geo

in 1980 they asked the same question.....rates exploded with the stock market......nobody could believe their eyes......rates go up when the economy  gets strong.....the market discounts a strong economy......got a long way to go



#3 Data

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Posted 29 September 2017 - 05:20 PM

1. 10 billion dollars per month is a drop in the bucket.

2.  Any analysis that ignores asset purchases by the central banks and net debt issuance by the related governments is missing about 99 percent of the flow picture.

3.  Lifting of debt ceiling introduces more far supply than 10 billion dollars.  So far, the primary dealers may have absorbed 386 billion dollars in new debt supply.   Another 500 billion dollars is expected to be raised in Q4.  Remains to be seen when the market will have to absorb the supply.

4. Situation is similar to November 2015, the date when the debt ceiling was last renewed, except rising dollar is no longer a drag on markets and oil-related SWF's and FCB's are no longer raising funds by selling assets.  There was a delay between when the government started raising debt and when the markets fell.   Remains to be seen if it occurs with debt ceiling expiring so soon on Dec 8.

5. If plans to reduce asset purchases are followed in Europe and possibly Japan, there may be a point after Q3 2018 when the flow turns negative; i.e., more debt being sold than purchased by CB's.


Edited by Data, 29 September 2017 - 05:23 PM.


#4 opinionated

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Posted 01 October 2017 - 09:58 AM

Looking for a counter trend bounce this week in bonds...  Bonds are destined to go lower as I was advised weeks ago when I posted my long TLT position which I ignored and got my arse handed to me. But this week I think longs will be very safe.

 

No position



#5 Data

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Posted 01 October 2017 - 10:08 AM

China just lowered its reserve requirements, just as in February 2016.  Both Japan and China have eased now in the last two to three weeks.

 

Once the next debt ceiling date arrives in December, the issuance of new supply will stop again.   Once again, there will be about $140-170 billion in monthly central banks' debt purchases going up against on average $70.billion in net debt issuance from Europe, Japan, and the US.



#6 Geomean

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Posted 02 October 2017 - 08:54 AM

"1. 10 billion dollars per month is a drop in the bucket."  Good point.  This Wikipedia entry indicates that the monthly purchases during QE were multiples of 10 billion dollars per month, perhaps approaching 80 billion per month at the start and that the EU and Japan program current purchases vastly exceed the Fed's initial balance sheet reduction rate. Their QE programs probably encourage competing private buyers to look to Treasuries.  Whether that demand exceeds the additional US public market borrowing needs is hard to tell.  In June the CBO projected the US deficit in 2017 at-693  Billion and in 2018 at -563B. 

https://en.wikipedia..._QE2.2C_and_QE3

 

Your other points are helpful too. 

 


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#7 Data

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Posted 02 October 2017 - 09:22 AM

QE issues are often covered here.

 

https://twitter.com/schuldensuehner

 

CFR's Brad Setser covered the topic of debt purchases versus debt issuance.  He estimates there is $70 billion more being purchased each month than is being sold.

 

https://www.cfr.org/...chases-currency


Edited by Data, 02 October 2017 - 09:23 AM.


#8 da_cheif

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Posted 02 October 2017 - 09:25 AM

i thought this was a stock market board

 

QE issues are often covered here.

 

https://twitter.com/schuldensuehner

 

CFR's Brad Setser covered the topic of debt purchases versus debt issuance.  He estimates there is $70 billion more being purchased each month than is being sold.

 

https://www.cfr.org/...chases-currency

i thought this was a board about the stock market



#9 DaVinny

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Posted 03 October 2017 - 07:05 AM

it is not a 'could', but rather stocks would only drop if bonds drop because of relative attractive yield in stocks until bond yields rise

https://seekingalpha...article/4031387
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