Wednesday, August 23, 2017

The US Fed will probably not reduce its Balance Sheet

"With the Federal Reserve, we don't know for sure what the impact will be. There is no clear co-relation between the movement of interest rates, between period of quantitative easing and tapering off. I do not believe that the Fed will reduce its balance sheet, but just in case they did, I am not sure that bonds will collapse and that interest rates will go up. 

There are many other factors. Everybody has been bearish about government bonds in the US, Europe and Japan. In the case of Japan, people have been bearish about Japanese government bonds for 15 years and what has happened is that interest rates kept on going down. So, we don't know exactly where we stand. 

The bond market in the US in my opinion would rather suggest that the economy is not that strong. That is the message from the bond market. If we look at the bond market in the US, the 10-year is yielding 2.228% at present. Now in France the yield is 0.72%, in Germany 0.45%, in Italy -where everybody said the country is bankrupt -the yield is 1.99%. 

In Japan, that has the biggest government debt as a percent of the economy of any country, the yield on the 10-year JGB is 0.05%. Bonds is a very complex issue and that has little do with immediate Fed action. 

In fact, the bond market doesn't like monetization. In other words, they don't like QE1, QE2, QE3. The bond market thinks that it is inflationary."

via indiatimes