balance sheet - What We're Reading - StockBuz2024-03-29T08:58:21Zhttp://stockbuz.ning.com/articles/feed/tag/balance+sheetEconomists Expect Fed to Start Shrinking Balance Sheet This Yearhttp://stockbuz.ning.com/articles/economists-expect-fed-to-start-shrinking-balance-sheet-this-year2017-04-14T16:03:58.000Z2017-04-14T16:03:58.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p>Most economists surveyed by The Wall Street Journal expected Federal Reserve officials to begin winding down their $4.5 trillion <a href="https://www.wsj.com/articles/the-feds-bond-portfolio-is-growing-up-and-that-means-less-support-for-the-economy-1486031403" class="icon none">portfolio of bonds</a> and other assets this year.</p>
<p>Nearly 70% of business and academic economists polled in recent days expected the Fed will begin allowing the portfolio, also called the <a href="https://www.wsj.com/articles/federal-reserve-readies-plan-for-balance-sheet-1491000013" class="icon none">balance sheet</a>, to shrink by allowing securities to mature without reinvesting the proceeds at some point in 2017. Of the economists who expected a shift in the Fed’s balance sheet strategy this year, the majority predicted the process would begin in December.</p>
<p>In last month’s survey, just 22.2% of economists expected the Fed to begin <a href="https://www.wsj.com/articles/fed-grapples-with-massive-portfolio-1485717712" class="icon none">shrinking its portfolio</a> this year. Fewer than a quarter of economists in the latest poll expected the Fed to wait until the first quarter of next year to start to whittle down its portfolio, compared to a third last month.</p>
<p>In recent weeks, Fed officials have said they are discussing plans to start gradually reducing the large bondholdings the central bank accumulated during and after the financial crisis through asset-purchase programs aimed at lowering long-term interest rates and boosting economic growth.</p>
<p>The Fed wants to shrink the balance sheet to an undetermined size now that the economy is growing moderately, although officials haven’t decided exactly how to do it or when to start.</p>
<p>The central bank currently reinvests the proceeds from its maturing assets, and could decide to taper the pace of those reinvestments over several months or cease them altogether.</p>
<p>Fed Chairwoman Janet Yellen and other senior officials have stressed that they want the process to be gradual and predictable.</p>
<p>“Expect the Fed to announce tapering strategy details at the December meeting with reinvestments beginning to decline in January 2018,” Deutsche Bank Chief U.S. Economist Joseph LaVorgna said in the latest WSJ survey.</p>
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<div class="wsj-article-caption" itemprop="caption"><a href="https://si.wsj.net/public/resources/images/OG-AM538_FEDSUR_FON_20170412154958.png" target="_blank"><img src="https://si.wsj.net/public/resources/images/OG-AM538_FEDSUR_FON_20170412154958.png?width=450" class="align-full" width="450" /></a><span class="wsj-article-caption-content">When Will the Fed Act? / Expectations for the next interest-rate increase in June have soared since the Fed last raised rates in March</span> <span class="wsj-article-credit" itemprop="creator"> Source: WSJ Survey of Economists</span></div>
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<p>Some of the business and academic economists polled this month said they view shrinking the balance sheet as complementary to tightening monetary policy through gradual increases in the Fed’s benchmark short-term interest rate, the federal-funds rate, since shrinking the balance sheet would likely cause long-term rates to rise.</p>
<p>Scott Anderson at Bank of the West said he expects the Fed to raise the fed-funds rate in June and September and then pause rate increases “for a while as they start to scale back their balance sheet.”</p>
<p>Gregory Daco of Oxford Economics expected the Fed to hold off on raising rates in the final quarter of this year once it begins addressing the balance sheet. “The Fed is eager to mop up excessive liquidity,” he said.</p>
<p>On interest rates, most economists surveyed expected the Fed to hold short-term interest rates steady at its May 2-3 policy meeting, and next raise them in June.</p>
<p><a href="https://www.wsj.com/articles/fed-raises-interest-rates-remains-on-track-to-keep-tightening-1489600935" class="icon none">Fed officials raised the fed-funds rate</a> last month by a quarter percentage point to a range between 0.75% and 1% and penciled in two more moves this year.</p>
<p>Nearly 80% of the economists surveyed expected the Fed will raise rates at its June 13-14 policy meeting, up from nearly 70% in last month’s survey. Just two out of 61 economists polled in April expected the next rate increase in July, 10 expected it in September and only one predicted officials will hold off until December to next raise rates.</p>
<p>While most economists forecast the next rate rise in June, they were divided over when the Fed will move after that. More than half, 55.7%, expected the central bank to increase interest rates to a range of 1.25% to 1.5% in September. Just under a third, 31.1%, expected the third rate increase of 2017 in December.</p>
<p>Economists saw just an average 14% probability of a rate increase in May.</p>
<p>The Wall Street Journal surveyed 61 economists from April 7 to 11, but not everyone answered every question.</p>
<p>Courtesy of <a href="https://www.wsj.com/articles/wsj-survey-most-economists-expect-fed-to-start-shrinking-balance-sheet-this-year-1492092000?mod=e2twe" target="_blank">WSJ</a></p>
</div>There's a Big Reason Volatility Might Be Coming Backhttp://stockbuz.ning.com/articles/there-s-a-big-reason-volatility-might-be-coming-back2017-04-09T21:17:48.000Z2017-04-09T21:17:48.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><blockquote>
<p><em>Stan Druckenmiller recently <a href="https://www.thefelderreport.com/2016/01/07/the-greatest-money-manager-alive-attributes-the-majority-his-success-to-just-this-one-thing/">elucidated</a>: “Earnings don’t move the overall market; it’s the Federal Reserve Board… focus on the central banks and focus on the movement of liquidity… most people in the market are looking for earnings and conventional measures. It’s liquidity that moves markets.”</em></p>
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<p>Even with the bond market’s muted response to the Federal Reserve’s <a itemscope="itemscope" itemprop="StoryLink" href="https://www.bloomberg.com/news/terminal/ONY7C03TCF15" title="U.S. Federal Reserve Meeting Minutes for March 15 (Text)" class="terminal-news-story" target="_blank" rel="nofollow noopener">plan</a> to begin winding down its almost $4.3 trillion portfolio of mortgage and Treasury securities, there are plenty of reasons why the calm probably won’t last.</p>
<p>Out of style for almost a decade, volatility may be on its way back if you take a closer look at the mechanics of the Treasury and mortgage markets. Despite the Fed’s mantra of seeking to carry out its policy shift in a “gradual and predictable manner,” analysts say the effects of ending the reinvestment of the proceeds from maturing securities will still be felt.</p>
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<p>This is the “most highly anticipated event in central-bank history,” said Walter Schmidt, senior vice president of structured products at FTN Financial in Chicago. “We’ve known this for two years. We’ve been waiting for this.”</p>
<p>While the three rounds of Fed asset purchases that became known as quantitative easing sapped volatility, former Fed Chairman Ben Bernanke’s comments in May 2013 that the central bank was considering scaling back purchases showed how quickly that can change. The so-called taper tantrum sent yields surging.</p>
<p>As the Fed begins to unwind, here are four reasons why we may see a renewal in volatility:</p>
<h3>1. MBS Supply/Demand Shift</h3>
<p>The Fed owns $1.77 trillion of agency mortgage-backed securities, about 31 percent of the market. As the central bank’s MBS holdings begin to roll off, mortgage spreads to Treasuries are going to have to widen to adjust for the additional supply, which some analysts estimate will begin at around $5 billion a month.</p>
<p>Since the Fed concluded quantitative easing in October 2014, the spread between Fannie Mae 30-year current coupon and Treasuries has been sitting between 90 and 114 basis points, below its historical average of about 137 basis points. Mortgage spreads may widen five to 10 basis points once the market prices in a certainty of tapering reinvestments and another 10 to 20 basis points over the longer term, Citigroup Inc. analysts estimate.</p>
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<h3>2. Increased Convexity Hedging</h3>
<p>If the Fed decides to pause interest-rate hikes while letting the balance sheet shrink, mortgage rates are still going to rise because a large source of demand is disappearing. As a result, prepayment speeds, the pace at which borrowers pay off loans ahead of schedule, are going to fall, which will cause the duration of the securities to increase.</p>
<p>It’s still a double whammy if the Fed continues to raise rates. Fed tightening would push up the effective fed funds rates, also reducing prepayment speeds and increasing the average duration of the securities.</p>
<p>When rates rise, hedging against so-called <a itemscope="itemscope" itemprop="StoryLink" href="https://www.bloomberg.com/news/articles/2017-03-19/bond-market-calm-is-threatened-by-fed-s-1-75-trillion-mbs-shift" title="Bond Market Calm Is Threatened by Fed’s $1.75 Trillion MBS Shift" target="_blank">convexity</a> risk grows as the expected life of mortgage debt increases. That happens when refinancing slows and tends to leave holders more vulnerable to losses as lower-duration securities are more vulnerable to rising rates. By protecting against those potential losses (selling Treasuries or entering into swaps contracts), traders can end up making the bond market more turbulent.</p>
<h3>3. Rise in Term Premium, Withdrawal from Risk Assets</h3>
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<p>As the market prepares for the Fed’s unwind, it should place upward pressure on the 10-year term premium, a measure of the extra compensation investors demand to hold a longer-term instruments instead of rolling over a series of short-dated obligations. The premium could rise 47 basis points over the course of 2018 and 2019 due to the reduction in duration, according to Bank of America Merrill Lynch strategists. Higher term premiums, coupled with increased mortgage duration could also cause a steepening of the five- to 10-year yield curve.</p>
<p>There’s also a chance that an increase in term premium triggers a withdrawal from risk assets such as equities, which have risen to record highs during almost a decade of accommodative Fed policy, though “the risk asset link is not as certain,” according to Bank of America strategist Mark Cabana.</p>
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<h3>4. Surge in Front-End Treasury Rates</h3>
<p>The front end of the Treasury market will have its own set of issues when the balance sheet starts to shrink. The Treasury Department will have to decide which portion of the curve it wants to issue more securities: The front-end, where Treasury bills outstanding comprise less than 13 percent of marketable debt, or the long-end to take advantage of 30-year bonds trading around 3 percent.</p>
<p>“Treasury is going to need to increase front-end supply pretty notably,” Cabana said. “Banks losing reserves will be looking to replicate those assets.”</p>
<p>Assuming Treasury ramps up bill supply, rates on debt maturing in less than one year would likely rise, forcing up the overnight rate on Treasury repurchase agreements. That may cause usage at the Fed’s fixed-rate overnight reverse repurchase agreement facility to sink, as investors will pivot away from the operation.</p>
<p>“Overall, this should pressure rates higher, with banks having relatively more securities to finance in the repo market as time goes on,” said Scott Skyrm, managing director at Wedbush Securities in New York.</p>
<p>Courtesy of <a href="https://www.bloomberg.com/news/articles/2017-04-09/fed-s-big-unwind-risks-reigniting-u-s-bond-market-volatility" target="_blank">Bloomberg</a></p>
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