WILL THE FEDERAL RESERVE PROVIDE CLARITY ON ITS BOND HOLDINGS? / THE FINANCIAL TIMES

Will the Federal Reserve provide clarity on its bond holdings?

FT Reporters




Will the Federal Reserve provide clarity on its bond holdings?

Investors and economists are supremely confident that the US central bank will leave policy unchanged at this week’s monetary policy meeting, but there will still be plenty to digest — not least details of the Fed’s plans for its multitrillion-dollar balance sheet.

The Fed Funds market indicates that not only is there virtually zero chance of policymakers raising interest rates this week, it is now pointing to an extended pause from the central bank and a more than a 25 per cent chance that it cuts rates by the end of the year.

There will therefore be plenty of attention to the Fed’s revised economic forecasts. Although the central bank’s rate setters on the Federal Open Market Committee have sounded a cautious tone lately, several have stressed that they still plan to raise rates at least once more this year.



The greatest attention is likely to fall on any details offered on the Fed’s balance sheet which was swelled to a peak of $4.5tn through various quantitative easing programmes in the wake of the financial crisis.


But since 2017 the central bank has been shedding the bonds it acquired, deflating the size of its balance sheet to just under $4tn. However, the pace at which the Fed is offloading the debt it bought was one of the factors behind last year’s turbulence in financial markets, and Fed chair Jay Powell said last month that an announcement on its future balance sheet would come “fairly soon”.

That led economists to predict that a more detailed road map for “quantitative tightening” could come at this week’s meeting. But just how far it will trim has remained unclear, and whether it will slow its selling as it approaches the end point. On Wednesday, more clarity is likely to come. Robin Wigglesworth

Will UK government bonds wake up?

Their current snooze is certainly sparking curiosity. Gilts investors are clearly aware that the UK is trapped in a chaotic process of leaving the EU — an event with deep and broad implications for all UK markets, chiefly sterling but bonds and equities too. And yet the market is not really moving.

Robert Stheeman, who runs the UK’s Debt Management Office, noted to Reuters this week that “the market is currently quiet and relatively benign”. Ructions in the bond market have “rarely been noticeable”, he added.

In part, this reflects the same paralysis that is keeping sterling nervous but still within a tight range; without any certainty on how Brexit will pan out, investors are loath to jump in either direction.

In addition, the question ‘what would gilts do in a no-deal Brexit?’ is not straightforward.

For sterling, it is simple: the harder the Brexit, the larger the fall. For gilts, all things being equal, the “fear trade” from a deal-free divorce would almost certainly send bond prices flying and hammering yields down, particularly on the assumption that the Bank of England would respond with substantial stimulus.

But at the same time, the risk of inflation, fuelled by a plunge in the pound, would hurt gilts. In addition, some fund managers suspect that the government would find a way to smooth the blow with fiscal stimulus — another likely drag for the bond market.

Taken together, it is therefore hard to see how benchmark 10-year government bond yields can shift meaningfully from their current level of 1.19 per cent. A no-deal Brexit, which few in financial markets seriously expect, may be the only way to find out. Katie Martin

What is driving down the Hong Kong dollar?

A sliding Hong Kong dollar is again forcing the territory’s central bank to intervene in the currency markets, for the first time since August. The Hong Kong Monetary Authority has bought up $692m worth of Hong Kong dollars over the last week after the currency hit the lower limit of a trading band that dates back to 2005.

But this time it may also be China’s stock market rally — in addition to the US Federal Reserve — piling downward pressure on Hong Kong’s currency.

Even though the territory’s de facto central bank has raised its overnight lending rate in lockstep with the Fed, this has had little impact on the broader cost of borrowing thanks to the ample liquidity sloshing around in Hong Kong’s banking system. A gap of almost one percentage point between three-month Hibor, Hong Kong’s interbank lending rate, and US equivalent Libor, has prompted investors to sell lower-yielding Hong Kong dollars for the higher-yielding US dollars.

But now another seller of the Hong Kong dollar has entered the scene. Ronald Man, North Asia rates and foreign exchange strategist at BofA Merrill Lynch, said Hong Kong-based investors were selling Hong Kong dollars as they purchased renminbi to invest in China’s rocketing stock market.

Mr Man said the institutional investors who helped drive the weakness in the Hong Kong dollar last year “are probably very close to being at their limit, whereas more of the depreciation process here on in will be driven by the equities investors”.

Neither he nor any other analysts are worried about the viability of the Hong Kong dollar’s peg, though, as the latest interventions still left HKMA with HK$71bn to marshal in defence of Hong Kong’s currency if needed. Hudson Lockett