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Half Anchored

Published on October 16, 2023 by Premium

Median longer term inflation expectations have been returning towards 2%, but the median hides significant dispersion that has widened and persisted. A range of surveys finds that a notable fraction of survey respondents since 2021 have revised their expectations away from 2%. At least a third of households now appear to have durably revised their inflation expectations to above 4% in the coming years. Surveys of business inflation expectations also show an upward shift but

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Fool Me Once

Published on October 9, 2023 by Premium

The market may finally be overestimating the expected path of policy after two years of persistently underestimating the Fed's willingness to hike. Recent data suggests that economic growth and employment continue to steadily increase even as inflation is clearly trending lower. This suggests a softening labor market is not necessary to lower inflation and raises the bar for additional tightening. At the same time, financial conditions are notably tightening with the steady rise in longer

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Slow Money

Published on October 2, 2023 by Premium

Real money investors are unlikely to be the next marginal buyer of Treasuries as they have historically preferred other assets and are subject to certain constraints. Real money investors like pension funds and life insurers manage vast pools of assets and look for longer dated assets to match their longer dated liabilities. They appear to be natural buyers of Treasuries, but have in practice had little exposure even before the QE era. They may change

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Maxing Out

Published on September 25, 2023 by Premium

The Treasury market may be entering a period of volatility as leveraged investors have stalled in their purchases and the next marginal buyer has not yet arrived. When the Fed and commercial banks stepped away from the Treasury market, hedge funds stepped in and bought cash Treasuries in size as part of a cash futures basis trade. The financing for that trade is sourced through dealer repo, which grew rapidly and then stalled. While dealers

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Liquidity Event

Published on September 18, 2023 by Premium

The potential for a replay of a March 2020 liquidity event in markets is on the rise as the rate of growth of debt continues to far exceed growth in the market's capacity to provide liquidity. The latest Fed financial accounts data show that dealer warehousing capacity has trended higher but still remains notably below GFC levels seen over a decade ago. At the same time, the level of corporate bonds, Agency MBS, and Treasuries

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Outlagging the Rest

Published on September 11, 2023 by Premium

The dollar looks to strengthen as the lagged impacts of monetary policy weigh on other major economies and compel their central banks to relent first in their restrictive policies. Economic growth abroad appears to be faltering as higher rates reduce disposible income via higher mortgage rates and also reduce the availability of bank credit. At the same time, the U.S. economy continues to grow above trend and even potentially at an accelerating pace. The U.S.'

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Dollar Deleveraging

Published on September 5, 2023 by Premium

Higher dollar interest rates appear to be prompting a deleverging of the off-shore dollar banking system that that may presage an extended period of poor global growth. Unlike domestic banks, foreign banks do not have a broad retail dollar deposit base and must fund their dollar assets at money market rates. The squeeze on bank profitability seen in smaller domestic banks is thus magnified for foreign banks and appears to be contributing to a reduction

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Adrift at Sea

Published on August 28, 2023 by Premium

A couple key assumptions that underpin the interest rate views of some market participants are potentially shifting higher. Standard macroeconomic thinking views nominal interest rates as in part determined by the central bank's perceived neutral rate ("r*") and it's inflation target. There is growing discussion that both the neutral rate has risen and that the Fed's inflation target should be higher. The possibility of such a shift would likely impact the investment decisions of some

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Steepening Stance

Published on August 21, 2023 by Premium

The Fed is guiding towards rate cuts next year while also continuing QT, which together imply a steepening influence on the curve. Fed officials have begun signaling modest rate cuts to prevent real interest rates from rising even as the rate of inflation trends downward. At the same time, a number of Fed officials are considering breaking from tradition and maintaining QT even amidst rate cuts. This is happening even as supply and demand dynamics

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Credit Normalization

Published on August 14, 2023 by Premium

Credit quality across the major segments of U.S. debt markets are solid and corroborate on-going economic strength. Lenders across capital markets, commercial banks, and private credit broadly indicate a slight deterioration in quality that is best understood as normalization from historically benign conditions. This is also reflected in a slight tick upwards in bankruptcy filings towards filing rates prevailing before 2020. Persistently high nominal economic growth suggests the benign conditions will continue as corporate cashflows

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