Monetary Policy & Inflation | US
QT2 Is Unlikely to Impact Yields in 2022
- By Dominique Dwor-Frecaut
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- 3 minutes read
Summary
• Net Treasury coupon issuance will likely fall this year by more than the Fed’s Treasury portfolio contracts.
• Even if it does not, higher net Treasury issuance seems unlikely to impact yields as the relationship between the two has broken.
• Net issuance is however correlated with the slope of the curve ie lower net issuance in 2022 supports a flatter curve
• The lack of impact of net issuance on yields could reflect the extreme financialization of the economy. That, in turn, is due to central banks running ultraloose monetary policies to offset structural disinflationary trends.
• The Fed still believes in R* and is unlikely to pursue – or even allow – de-financialization. Even with four hikes and a slowdown in inflation to the December SEP end-2022 forecast, the end-2022 real Fed Funds rate would still be -1.5%.
Market Implications
• Higher net issuance this year is unlikely to impact yields.
• The risk selloff may not last.
Summary
• Net Treasury coupon issuance will likely fall this year by more than the Fed’s Treasury portfolio contracts.
• Even if it does not, higher net Treasury issuance seems unlikely to impact yields as the relationship between the two has broken.
• Net issuance is however correlated with the slope of the curve ie lower net issuance in 2022 supports a flatter curve
• The lack of impact of net issuance on yields could reflect the extreme financialization of the economy. That, in turn, is due to central banks running ultraloose monetary policies to offset structural disinflationary trends.
• The Fed still believes in R* and is unlikely to pursue – or even allow – de-financialization. Even with four hikes and a slowdown in inflation to the December SEP end-2022 forecast, the end-2022 real Fed Funds rate would still be -1.5%.
Market Implications
• Higher net issuance this year is unlikely to impact yields.
• The risk selloff may not last.
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