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Lauren STAGNOL, Bruno TAILLARDAT
FOMC members plan to reduce the Fed’s balance sheet this year and gave recently some precisions about how they will do. Even if the reduction of the Fed’s balance sheet will take place very gradually, the amount of Treasury securities that non-Fed investors will be very large. Moreover, the evolution of the Chinese FX policy will be crucial.
Fixed Income and FX Strategy
Equity Research and Strategy at Amundi Japan
Interest rates behaved highly atypically from 2004 to 2006. While the US central bank raised its policy rate at every meeting, long-term interest rates remained so remarkably stable that former Fed Chairman Alan Greenspan described their behaviour as a “conundrum.” Comparing long-term rates to their theoretical level based on fundamental valuation models, we show that the anomaly was on average 40 bps. Various explanations have been put forward for this, including investors' changed attitude to risk, and the rise in US Treasury purchases by different categories of buyers. We show that, while these variables could theoretically be responsible for the decline in bond risk premiums, they explain less than half of the anomaly when incorporated into a fundamental model of bond yields. However, their recent changing influence could justify their being used for a prospective analysis of bond yields.
Ombretta SIGNORI, Kokou TOPEGLO