The market is in search of any indication from the Fed as as to if it is going to regulate the bond buy
US Treasury Secretary Steven Mnuchin and Federal Reserve Chairman Jerome Powell are held on Capitol Hill ahead of a House Financial Services Committee monitoring hearing on the Coronavirus Disease (COVID-19) Pandemic Response of the Treasury and the Federal Reserve testify in Washington, USA on September 22nd, 2020.
Joshua Roberts | Reuters
The Federal Reserve could provide guidance on its bond-buying program when it releases its minutes on Wednesday, but the chances of the central bank taking action at its December meeting have decreased slightly with the expected appointment of Janet Yellen as Treasury Secretary.
The minutes of the last Fed meeting will be released on Wednesday at 2 p.m. ET. The Fed spoke at that meeting in early November about possible ways to adjust the program to expose some aspects of this discussion.
Market speculation had suggested that when the Fed meets in December, the Fed will optimize the bond-buying program by changing the maturity of the bonds it buys, but keeping total government bond purchases at $ 80 billion per month. The theory is that if the Fed increased purchases of longer-term government bonds like 10-year bonds and 30-year bonds, it would prevent interest rates that affect mortgages and other borrowing from rising.
Vincent Reinhart, chief economist at Mellon, said the logs may not reveal much other than that changing the average length of his purchases is just one possibility. "The logs are not about news. At some level there will be natural disappointment," he said. "We will likely get information about your intentions in buying assets and whether it will be more rule-based."
Yellen is expected to be appointed to the Treasury Department by President-elect Joe Biden and, as a former Fed chief, is expected to show sympathy for the Fed and also advocate for fiscal stimulus. Some market pros had expected the Fed to resume its bond program in December as Congress did not approve any further stimulus to the economy as the virus outbreak worsened. Some now theorize that knowing that Yellen is a strong proponent of other incentives, the Fed could hold the bond program on hold.
"I still think it's a possibility. It's a coin toss. It could have been 60/40, but since (Yellen) may be Treasury Secretary, there might be a 'let's see,'" said Jim Caron, director of global macro strategies at Morgan Stanley Investment Management.
The 10-year government bond yield, which hovered 1% earlier this month, traded lower amid speculation that the Fed would buy more government bonds in the sector. The 10-year yield was slightly higher on Tuesday at 0.88%.
The market was divided on whether the Fed would move, but expectations rose after Treasury Secretary Steven Mnuchin told the Fed last week that the Treasury would not extend some of the Fed's end-of-year emergency programs.
But strategists say Yellen would likely try to restore those programs pretty quickly if the Fed believes it still needs those backstops. The Fed's corporate and municipal debt programs were among those affected.
"The best metaphor is that Secretary Mnuchin has dismantled the barriers they put in place, and the end of the year is a sharp turn and that's dangerous," said Reinhart. But he added that the Fed is still in control of the programs it needs to manage the year-end markets, such as the repo operation.
He said that if the Fed continues the bond program, it might actually not have much of an impact. "You have the 10-year treasury as low as you want. You have housing fully at the boiling point," he said.
After the November meeting, Fed Chairman Jerome Powell said the Fed had had a "useful discussion" on the bond purchase program but believed it was effective and the Fed was providing the right amount of shelter.
The Fed buys a total of $ 120 billion a month as part of its asset purchase program, including $ 40 billion in mortgage paper. If the Fed changed its government bond purchases, market pros could double the nearly $ 10 billion it buys at the long end of the curve.
Ian Lyngen, head of interest rate strategy at BMO, said Yellen's nomination couldn't make much of a difference. "As an aside, I'd say it might make the decision to extend the weighted average maturity of Treasury purchases a little bit more difficult. I don't think that will change the end-of-day calculation, however. At this point, I think the Markt thinks they do, "Lyngen said. He said the 10-year yield could move back towards 1% if the Fed does not increase the lengthy end purchases.