Prior to the release of the highly anticipated US February CPI data, the overall cautious sentiment in the US bond market overnight was strong, with yields on various maturities generally rising. An unnoticed corner of the market on that day was that an emergency loan tool launched by the Federal Reserve last year to rescue the banking crisis had officially expired after the close of trading on Monday, which may once again put the financing market to the test of liquidity. Whether the Federal Reserve will reduce its QT early has once again become a focus of attention for some industry insiders.
Market data shows that US bond yields collectively rose overnight, partially reflecting market concerns about the possibility of another increase in US CPI data. Among them, the 2-year US Treasury yield increased by 6.7 basis points to 4.549%, the 5-year US Treasury yield increased by 3.8 basis points to 4.092%, the 10-year US Treasury yield increased by 2.1 basis points to 4.101%, and the 30-year US Treasury yield increased by 0.8 basis points to 4.263%.
On Monday, a large number of new corporate bond issuance also depressed the treasury bond bond market. Tom di Galoma, co head of global interest rate strategy at investment firm BTIG, said, "Usually Monday is a day with a very high volume of new bond issuance. So I think part of the reason why yields in Europe and the United States have risen is because of this."
Wall Street traders typically want to lock in the borrowing costs of the corporate bonds they underwrite. As part of this process, dealers sell treasury bond as hedges to lock in borrowing costs before selling bonds. Once bonds are sold, dealers will buy treasury bond to exit "interest rate locking".
At present, the biggest focus in the industry is undoubtedly the US CPI data released tonight. The latest media survey predicts that the overall month on month CPI growth rate in February is expected to be slightly higher than in January, but core CPI data is expected to further decline.
Bank of America's Global Research Department had a relatively optimistic forecast for CPI in a report on Monday. The bank believes that the February Consumer Price Index "should alleviate people's concerns about the re acceleration of inflation after the release of January data.". Bank of America added, "Overall, a report that meets our expectations will allow the Federal Reserve to begin cutting interest rates at its June meeting."
However, after the continuous rebound in US bond prices over the past two weeks, some industry institutions are not optimistic about the prospects of the bond market. Barclays Bank last weekend believed that investors should consider selling 10-year treasury bond bonds, because the resilience of the world's largest economy, the US economy, is making the recent rise in US bonds appear excessive.
Barclays strategists Anshul Pradhan and Amrut Nashikkar pointed out in a report that "the decline in yields is' unusual 'when the US economic data has performed better than expected in recent weeks. The latest data shows that the US economy is still resilient and the labor market is strong, which has led to the growth of real income. The rebound in US debt in the past few weeks seems excessive. We suggest shorting the 10-year US treasury bond bonds."
In addition to the resilience shown by economic data, Barclays strategists say that the increase in bond supply in the coming months and the Federal Reserve's goal of shortening overall debt maturity are also worth cautious, especially in the context of strong data performance.
Bank term financing instruments officially mature
It is worth mentioning that for some industry insiders, this Monday is actually a sensitive time point: in order to boost market confidence in the financial system after the collapse of Silicon Valley banks, the Federal Reserve established an emergency loan tool project called the Bank Term Financing Program (BTFP) in March 2023, which officially expired on Monday.
At the end of last year, there were constant doubts that the Federal Reserve's banking rescue program had become an arbitrage tool for financial institutions. The Federal Reserve adjusted the BTFP interest rate in January this year, setting it no lower than the effective reserve balance rate on the day of loan disbursement, and announced that this temporary tool will end on March 11th as originally planned.
And with the official withdrawal of emergency rescue tools from the historical stage a year ago, it may also be a crucial test for the Federal Reserve.
After years of implementing stimulus measures aimed at boosting the post pandemic economy, the Federal Reserve is currently tightening its balance sheet through so-called quantitative tightening (QT). If the financing market begins to crack, the stability of the banking system may once again be at risk, which will also put the Federal Reserve's balance sheet tightening process at a standstill.
According to data from the Federal Reserve, as of last Wednesday, a total of approximately $164 billion was still lent through the BTFP. Mark Cabana, head of US interest rate strategy at Bank of America, stated that despite stable financing conditions, banks still hope to obtain higher liquidity buffers, and BTFP is a reflection of this demand.
After the expiration of the BTFP, banks that rely on the tool now have two options: either let these loans mature or seek other sources of financing. If banks do not replace BTFP loans, it may deplete reserves or the capital they have set aside to ensure resilience against unexpected shocks.
What they ultimately do will determine whether the liquidity within the system is sufficient, and may also affect the Federal Reserve's judgment: can they continue to scale down as planned or slow down the pace of scaling up as soon as possible? Although current financing market activities indicate that bank reserves are still abundant, this theme will still be a major consideration for Federal Reserve decision-makers at their March interest rate meeting.
Gennady Goldberg, head of US interest rate strategy at Dao Ming Securities, said, "We are not lacking financing yet, but we are getting closer, so slowing down the pace of (balance sheet reduction) may indeed make sense.".