Bank of America says the Fed will cut interest rates next year. Here’s what will happen to Treasurys.

All eyes will be on the Federal Reserve on Wednesday. The central bank is widely expected to continue the rapid pace of monetary policy tightening with a further 75 basis point increase in borrowing costs.

But even before it was confirmed that inflation had peaked, the market began pricing in interest opportunities cuts Next year as the economic downturn takes hold.

Bank of America strategists say that traders need to realize that this could mean less supply than expected in the bond markets.

“Our economists now expect the Fed to cut interest rates on September 23 to fight a mild recession,” says Megan Swiber and Mark Cabana, rate and currency strategists at Bank of America.

And if the Fed cuts interest rates to stimulate demand, quantitative tightening – where the central bank sells assets to drain liquidity – is also likely to end.

“The Fed is likely to hold off QT with rate cuts because of the contradictory signal it is sending on monetary policy and simplifying policy communications; the Fed will likely not want to loosen up with rate cuts but tighten with QT,” Sweber and Cabana wrote in note.

The Fed has a shape in this regard. When the trim rates started in 2019, I announced the end of QT at the same time. Such a move has significant implications for the treasury market.

Ending QT sooner “…decreases the amount of supply that the Treasury needs to issue to cover Fed redemptions. It also means that the Fed may make secondary purchases, further limiting the amount of supply the market needs to absorb,” he says. Strategists.

BofA believes that ending the QT in September 2023 will reduce the Fed’s balance sheet by at least $1 trillion compared to previous expectations for it to stop at the end of 2024 (see chart below).

Thus, “Treasury issuance is likely to be about $630 billion less in fiscal year 24 than if the Fed continued QT through the end of 2024,” he says.

How will this affect the benchmark bond yield? Well, to simplify, BoA estimates that the reduced supply translates to about 20 basis points in 10-year premiums on Treasury. The premium is the amount by which the yield on a long-term bond is greater than the yield on a short-term bond.

“Not only will the end of the previous QT be supportive of duration, but it will also improve supply/demand disruptions and market action,” BofA says.


S&P 500 ES00 index futures,
+ 0.86%
It rose 0.8% to 3,958 and Nasdaq 100 futures NQ00,
+ 1.42%
Shares jumped 1.3% to 12,275, with shares of the tech giants leading the way. Prior to the Fed’s decision, the DXY Dollar Index,
It fell 0.2% to 106.99 and the 10-year Treasury yields TMUBMUSD10Y,
It fell 1.5 basis points to 2.791%. WTI CL.1 futures contract,
+ 0.93%
It rose 0.8% to $95.72 a barrel while gold rose GC00,
+ 0.04%
It added 0.1% to $1,719 an ounce.


Good reception results from Microsoft MSFT,
and Alphabet GOOG,
-2.56%And the
Google’s parent company, which supported market sentiment early Wednesday.

A report showed that US durable goods orders rose 1.9% in June, above the 0.7% gain in May and stronger than the expected 0.5% decline.

German consumer confidence fell to a record low as households became concerned about the energy supply of the world’s fourth largest economy.

European gas prices earlier jumped another 10% to reach a new record for the Dutch TTF contract in August of 220 euros per megawatt-hour.

Credit Suisse CSGN,
+ 3.14%
He has another CEO. Ulrich Koerner will take over from Thomas Gotstein and provide a “comprehensive” review of the troubled Swiss bank’s business.

Wednesday is full of corporate earnings reports. Boeing Pa,
and Bristol-Myers Squibb BMY,
+ 1.08%
Figures published before the market opens. Ford F
-2.34%And the
Qualcomm QCOM,
and Meta Platforms META,
Are the highlights after the closing bell.

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This comes from the Bespoke Investment Group. The chart below shows the daily trajectory of the S&P index for each of the last three Federal Reserve days. You can see that the initial drop happened right after the rate decision at 2 pm, all three times, but then stocks rose strongly for the remainder of the day once Powell’s press conference started.”

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