Wall Street is under stress

Wall Street Futures and Gold continue to slip and are under pressure on the concern of faster Fed tightening amid hawkish jawboning by various Fed policymakers and after a more hawkish than expected Jackson Hole speech by Fed’s Chair Powell Friday. 

The U.S. 10Y bond yield is currently hovering around +3.15% and may break the recent June high of +3.498% in the coming days amid hawkish fed jawboning and higher QT from September TO $95B/M, almost double the pace in the last few months. 

Here in QT, Fed will not sell any TSY/MBS security in the secondary market (as of now), but is rather letting them mature to shrink its balance sheet; i.e. Fed will stop reinvesting (backdoor QE) significantly, which will eventually cause lower bond prices and higher yield. As experienced in previous 2019 occasions, such QT may also cause widespread USD shortage (as a funding currency).

The whole QT is somewhat of a complicated accounting process, involving settlement windows and redemption caps, but at a basic level, it ultimately reduces the supply of bank reserves and drains money from the financial system. Some safety valves have been implemented this time around, like the Standing Repo Facility, after chaos in the repo market prompted an early end to the last QT program in 2019. The new facility will allow primary dealers to borrow more reserves from the Fed against high-quality collateral, but some caution it might not be enough to stave off liquidity issues, and could complicate Fed’s plan to raise rates by jumbo size.

Source https://www.iforex.in/news/wall-street-under-stress-higher-bond-yields-amid-higher-202208312009