Via Global Macro Monitor,
The yield curve is flattening like a pancake.
Tightening cycles tend to do that.
Furthermore, the effective float of 10-year and longer U.S. notes and bonds is relatively small and greatly distorts the bond market signal. We have written about this several times.
In the most well-telegraphed, 'never in doubt, no matter how bad the economic data is' FOMC Statement ever, The Fed hiked rates by 25bps and maintained its rate-hike trajectory forecast, shrugging off the collapse in economic data (including weak inflation). The market was anticipating a so-called 'dovish hike' and The Fed delivered by saying it is "monitoring inflation developments closely" and also offered more detailed plans of the balance sheet unwind (beginning this year).
Earlier, we laid out how, in theory, the Fed's balance sheet unwind plan will work according to the FOMC: the Fed will trim reinvestments in TSYs at a rate of $6Bn/month initially, and MBS at $4Bn/month, or a total of $10bn/month, and will increase the reinvestment caps in steps of $10bn ($6TSY+$4MBS) at 3 month intervals over 12 months until it reaches a total 50bn per month.
Coming in earlier than many expected, the Fed for the first time laid out how it plans to "normalize" its balance sheet which it expects to reduce by trimming reinvestments in TSYs at a rate of $6Bn/month initially, and MBS at $4Bn/month, or a total of $10bn/month, and will increase the reinvestment caps in steps of 10bn at 3 month intervals over 12 months until it reaches a total 50bn per month.
Indicatively this is well below Goldman's expectation of $10bn and $5bn initial caps for TSYs and MBS, as we showed over the weekend.
Authored by Kevin Muir via The Macro Tourist blog,