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Yields rise before Fed meeting statement, retail sales disappoint

Yields rise before Fed meeting statement, retail sales disappoint

15 Jun 2021

NEW YORK: US Treasury yields rose on Tuesday before the Federal Reserve will conclude its two-day meeting on Wednesday, and after data showed that retail sales fell in May.

The Fed is not expected to announce any plans to pare its bond purchases until its August Jackson Hole economic symposium, though it may indicate that it has begun discussions about when to taper.

“There are some expectations surrounding the extent to which the Fed will discuss tapering,” said Ian Lyngen, head of US rates strategy at BMO Capital Markets in New York.

The lack of clarity in employment data, however, makes it difficult for the Fed to gauge the strength of the economic recovery and move ahead with any plans to tighten policy.

Extended unemployment benefits are not due to end for another several months while childcare issues remain because many schools also remain closed to in-person learning until the beginning of the school year, Lyngen noted. That means that “investors’ expectations are generally in a holding pattern until the fall,” he said.

Policymakers will also update their economic projections and markets will be focused on whether they upgrade their inflation projections and see a rate hike as likely in 2023.

Benchmark 10-year yields rose one basis point to 1.511%. They fell to a three-month low of 1.428% on Friday and have dropped from a one-year high of 1.78% in March.

The yields rose slightly after data on Tuesday showed that US retail sales fell more than expected in May.

Another key focus at this week’s meeting will be whether the Fed raises the interest its pays on excess reserves (IOER) and on reverse repurchase agreements (repo) as money market investors struggle with a lack of high-quality short-term assets.

The Fed’s reverse repo facility, which offers approved money managers the option to lend money to the Fed overnight in return for Treasury collateral, set a record $584 billion on Monday. Demand is expected to continue to grow as the Treasury continues to pare issuance of Treasury bills.

By raising the IOER the Fed can ease some downward pressure on short-term rates. Borrowing rates in the overnight repurchase agreement market were at one basis point on Tuesday.

Some analysts say that the Fed is unlikely to make any adjustments unless the fed funds rate falls below 5 basis points, which it has so far held above. The fed funds rate was at 6 basis points on Monday. The Treasury will sell $24 billion in 20-year bonds on Tuesday.