Monetary policy: breaking down 10-year US$ Treasury Yields
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Monetary policy: breaking down 10-year US$ Treasury Yields

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Monetary policy: breaking down 10-year US$ Treasury Yields Monetary policy: breaking down 10-year US$ Treasury Yields Presentation Transcript

  • Monetary policy in the spotlight Piet Lammens
  • Monetary policy after zero rate bound is reached  23 september 2013  2
  • Monetary policy after zero rate bound is reached (part 1): QE  23 september 2013  3
  • Determination 10-year Treasury yield ECONOMIC DATA LIFT – OFF DATE FORWARD GUIDANCE SLOPE OF OIS CURVE TERM PREMIUM QUANTITATIVE EASING 10-YEAR YIELD
  • QE pushes term premium sharply lower  23 september 2013  5
  • Real 10-yr yield (left) versus 10-yr breakeven (right)  23 september 2013  6
  • US 10-year yield  23 september 2013  7
  • QE objectives  Objective: lower longer term interest rates  Stimulate aggregate demand. Change demand/supply dynamics FI market  Push investors towards riskier assets (equity/corp)  Influence composition portfolio investors  Scarcity channel/duration channel/expectation channel  23 september 2013  8
  • QE costs  Inflated balance sheet  Exit policy more difficult  Fed effectively lost rate setting power  Excess reserves: banks no longer dependent on Fed  Remedies are possible, but jury is still out (IOER, reverse repo at FAFR)  Artificially pushing term (risk) premiums down: recipe for bubbles  23 september 2013  9
  • QE & Fed communication/evaluation  QE program linked to “substantial” improvement labour market. (1 yr: 8.1% to 7.4%)  Time path Bernanke (June FOMC meeting)  Costs programme increase (bal. sheet) and risks increase (Fed Stein: signs of overheating in some credit markets)  Criticism mounts (impact growth negligible: favours the haves versus the have-nots).  23 september 2013  10
  • QE end-game  Start tapering at Sept. FOMC meeting  Start?: $15/20B  Pace: Dec $20B, March & June14 $20/25B  Evenly divided between MBS & Treasuries  Data-dependent, but asymmetrical risk  Largely discounted? Sell-off May/June?  23 september 2013  11
  • Determine 10-year Treasury yield ECONOMIC DATA LIFT – OFF DATE FORWARD GUIDANCE SLOPE OF OIS CURVE TERM PREMIUM QUANTITATIVE EASING 10-YEAR YIELD
  • Monetary policy as zero bound is reached (part 2): Forward guidance  History (Fed- BoE – ECB)  Objective: influence curve beyond short term horizon  Promise about future rates (data-dependent/time- dependent/undefined time period)  Conditional  Credibility  Has reaction function CB changed?  23 september 2013  13
  • Forward Guidance Fed  Fed version  March 2009 - August 2011: commitment to keep rates low for an extended period  August 2011: explicit calendar guidance (at least through mid-2013, later shifted backwards)  Dec 2012: tied to unemployment rate & inflation • Unemployment rate 6.5%- inflation max. 2.5%, expect. anchored thresholds, no triggers  June 2013: QE tapering tied to unemployment rate too  23 september 2013  14
  • Forward Guidance  Fed tries to convince markets QE tapering has nothing to do with forward guidance FF  Possible changes to FG: lower unemployment rate threshold to 6% and/or floor for inflation (1.5%)  Markets have doubts (see recent curve moves)  ECB & BoE forward guidance lacks credibility  23 september 2013  15
  • Fed’s lift-off date  23 september 2013  16
  • Fed Funds projections (governors)  23 september 2013  17
  • Dec 2014/2015 FF future & increased rate expectations  23 september 2013  18
  • VS: Fed funds rate expectations  23 september 2013  19
  • Unemployment & participation rate  23 september 2013  20
  • Fed projections unemployment rate  23 september 2013  21
  • Fed projections GDP growth  23 september 2013  22
  • US core inflation  23 september 2013  23
  • Time path ST Euribor/Libor3m rates  23 september 2013  24
  • Forward Guidance & markets  Shift forward in lift-off date Fed rate change is not completely out of line with Fed guidance  Eco data to remain key  Uncertainty high about fundamentals after crisis  Quid productivity? Potential growth? Output gap?  Simultaneous shift forward ECB & BoE official rates, even before better eco date • Signs of normalization after debt crisis to happen faster? • If so, rate hike expectations still too shy  23 september 2013  25
  • 1994 revisited?  23 september 2013  26
  • KBC interest rate forecasts (Aug)  23 september 2013  27 POLICY RATE 2/sep 3m 6m 12m US 0.25 0.25 0.25 0.25 EMU 0.5 0.5 0.5 0.5 10 YR YIELD 2/sep 3m 6m 12m US 2.82 2.8 2.8 3.3 GE 1.9 1.8 1.8 2.1
  • 10-year Inflation swaps  23 september 2013  28
  • Determining 10-year US T-yield ECONOMIC DATA LIFT – OFF DATE FORWARD GUIDANCE SLOPE OF OIS CURVE TERM PREMIUM QUANTITATIVE EASING 10-YEAR YIELD
  • ECB policy  No pre-commitment was guiding principle  Inflation objective sacro-saint  2% was the unofficial bottom of rates  Now: refi-rate: 0.5%  LTRO loans FA/FF: liquidity enhancing  ECB lost power over money market rate  Eonia (& euribor) drop below refi-rate  23 september 2013  30
  • ECB historical July decision  New tool: Forward guidance  rates will remain ‘at present or lower levels for an extended period of time’  Easing bias: 50 bps is not floor  All rates are envisaged: keeps open possibility of neg. deposit rate  ECB wants to influence rates further out on the MM curve  End of “we never precommit” mantra  “Extended period” should be seen in terms eco data, not calendar dates, but…  It suggests no tightening until at least end 2014/mid 2015  Attempt to dissociate ECB policy from Fed policy & European yields from US ones (success poor in 1994)  EMU economy too weak to withstand higher yields  Is commitment credible or sounds it hollow?
  • Fed leads the way in good & bad days  23 september 2013  32
  • EMU: refi-rate expectations (euribor 3m)  23 september 2013  33
  • German 10-year yields more upside?  23 september 2013  34