The message of market stability from the chairman of the US Central Bank (Fed) Jerome Powell did not last a day. Powell emphasized in a media briefing on the 17th that “even if prices jump, it will only temporarily rebound,” but the US Treasury bond interest rate, in line with inflation, surged in one day.
Powell’s remarks that he would not raise the benchmark interest rate until 2023 were also refuted by leading investors. Ray Dalio, founder and co-Chief Investment Officer (CIO) of Bridgewater Associates, the world’s largest hedge fund, said, “The Fed will raise its benchmark interest rate faster than expected.”
Vaccine effect… Signs of overheating in the economy
The 10-year Treasury bond yield, which is used as a benchmark for the global asset market, exceeded 1.75% per year in the bond market on the 18th (local time) and ended at 1.71% per year. Compared to the previous day (1.63% per year), it increased by 8bp (1bp = 0.01% point). It is the highest figure in about 14 months since the end of January last year.
The 30-year maturity rate once exceeded 2.5% per year, the highest since August 2019. On this day, the Nasdaq fell by more than 3%, and the New York Stock Market was weak. Craig Johnson, market strategist of investment bank Piper Sandler, said, “It has become the market’s biggest concern at what speed government bond rates will rise.”
It is pointed out that Powell promised not to engage in austerity for a long time, but the market’s doubts are one of the main reasons for the soaring government bond rates. As the economy is rebounding sharply, the time for the Fed to taper (reduce asset purchases) and raise the base rate could be accelerated. “The market is starting to understand that faster growth means greater inflation,” said Ralph Accel Bank of America, interest rate strategist. Diagnosed.
In fact, the Philadelphia Federal Bank’s March Manufacturing Index released on that day was 51.8, the highest in 48 years since 1973. It exceeded the market forecast (22.0) more than twice. The March price and payment index also recorded 75.9, up 40% from the previous month (54.4). The highest since 1980. It is observed that some signs of overheating are also appearing thanks to the expanded supply of the Corona 19 vaccine and large-scale stimulus measures.
Fed “Bank SLR Exemption ended in 1 year”
Investors and investment institutions with high market influence have also warned of the possibility of an early tightening of the Fed. CIO Dalio appeared on Bloomberg TV and said, “To compare the economy to humans, doctors urgently applied stimulants when the pulse fell. “There will be more inflation than the Fed and the market forecast,” he argued.
In addition, as the Fed decided not to extend the exemption from the complementary leverage ratio (SLR) of banknotes scheduled to end at the end of this month on the 19th, it is observed that the instability of US Treasury yields has increased. SLR is a system in which large banks with total assets of more than $250 billion must hold a certain percentage as equity capital. The Fed decided to temporarily exempt SLRs after the financial market fell into chaos in the aftermath of Corona 19 last year. It was a measure to supply liquidity to the market by encouraging banks to purchase additional government bonds.
Initially, there were many observations in the market that the Fed would extend the SLR exemption. If banks sell their Treasury bonds to meet SLR standards, interest rates could rise further. However, the Fed said in a statement that “banks will not have to sell government bonds to meet the new SLR standards. Some large banks have sufficient capital of about 1 trillion dollars.” He added, “We plan to openly seek opinions on what level the SLR standards will be adjusted to,” he added. “We will take measures not to violate the soundness of the bank’s capital.”
New York = Correspondent Jae-Gil Cho [email protected]
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