Fed’s Plan to Cut Bond Holdings Could Be “Very Disruptive”
$DIA, $SPY, $QQQ, $VXX
JPMorgan Chase & Co’s (NYSEJPM) Chairman, Jamie Dimon, said Tuesday that the unwinding of Fed’s bond-buying programs is an unprecedented challenge that may be more disruptive than people think.
“We’ve never have had QE like this before, we’ve never had unwinding like this before,” Mr. Dimon said at a conference in Paris. “Obviously that should say something to you about the risk that might mean, because we have never lived with it before.”
Central banks led by the Fed are preparing to reverse massive asset purchases made after the financial crisis as their economies recover and interest rates rise.
The Fed alone has seen its bond portfolio swell to $4.5-T, an amount its want to reduce without roiling longer-term interest rates.
Mins of the FOMC’s 13-14 June meet indicate policy makers “wish” to begin the balance-sheet process this year.
“When that happens of size or substance, it could be a little more disruptive than people think,” Mr. Dimon said. “We act like we know exactly how it’s going to happen and we do not.”
Cumulatively, the Fed, the ECB and BOJ bulked up their balance sheets to almost $14-T. The unwind of such a large amount of assets has the potential to influence a lots of markets, from stocks and bonds to currencies and real estate.
“That is a very different world you have to operate in, that’s a big change in the tide,” Mr. Dimon said. All the main buyers of sovereign debt over the last 10 years, financial institutions, central banks, foreign exchange managers,will become net sellers now, he said.
The Big Q: Sellers to whom?
Investors are listening closely to policy makers to determine when and how central banks will start reducing their balance sheets.
A global bond rout spilled over into equities last week on signs that central banks are taking a more aggressive stance.
In Y 2013, 10-year yields soared by more than 1% over 4 months on a suggestion by then-Fed Chairman Ben S. Bernanke that the central bank could soon scale back bond purchases, an episode that became know as the Taper Tantrum.
Policy normalization in US, EU and Japan will cause the term premium to climb over the next 2 years as net bond issuance in the 3 regions turns positive, according to analysts.
The measure reflects the extra compensation investors demand to hold longer-maturity debt instead of successive short-term securities. The current term premium projection is still below 0.5% in Y 2019.
“The risk of near-term bond-market disruption seems limited,” the deputy chief investment officer at Credit Suisse Group (NYSE:CS). “Yet, further out, the future path of yields may be plastered with traps. Expect the Fed to readjust their strategy to every step, and to err on the side of caution, not boldness.”
Central banks would like to provide certainty but “you cannot make things certain that are uncertain,” Mr. Dimon said.
The CBOE Volatility Index (VIX) 10.91, -0.20) which points to the market’s anticipation of short-term uncertainty, declined by 1.8%.
Tuesday’s US major stock market indexes finished at: DJIA +0.55 at 21409.07, NAS Com +16.91 at 6193.26, S&P 500 -1.90 at 2425.54
Volume: Trade on the NYSE came in lite at:784,2-M/shares exchanged
- NAS Comp +15.1% YTD
- S&P 500 +8.3% YTD
- DJIA +8.3% YTD
- Russell 2000 +4.1% YTD
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