Compared to previous walking cycles, we see some key differences in the current situation. After all, the federation seems to have a lot behind the curve, which requires more front-loading reinforcement than usual.
Another key difference, at least for bond markets, is that the curve is unusually flat compared to previous prices. Therefore, we look forward to seeing the bond sale live on Fed (“active” QT) to postpone the reverse process.
This is an unrestricted area for walking cycles and, in our view, poses a significant risk to long-term bond products. Supports high risk factors in risk markets.
Stupid facts about walking cycles
Looking at previous cycling cycles, we would prefer to include only the last 30 years, for example, inflation was much lower than before (see) Chart). It gives us a total of four walking cycles of 1994-95, 1999-2000, 2004-06 and 2016-2018. The chart on page 2 shows the cycles by statistical length, annual walk, etc. Summary of key findings Here
- The walking cycles are 1-2 years (Longest 24 months, short 11 months)
- Policy prices have been cut for the past 8 months since the last walk In three cases and after 15 months in one case (2004-06 cycle). In two of the four cycles, the US was in a recession a year after its last trip. In both cases, however, property bubbles followed (the IT bubble in 2001 and the housing bubble in 2007).
- The federation was 20 years ago. He walked. Rates at 50bp (50bp changes are relatively common. cut off Cycles).
- The federation has. The walking cycle has not started at 50 BP since the 1980s.
- Most recent The 2016-18 cycle was a ‘very smooth’ approach.. The federation walked four times a year and at each meeting it was 25 BP (in December 2015 we ignored the loneliness trip).
- The 2004-06 hike was the longest.. It took 25 months and the federation raised 25 BP for 17 consecutive meetings. They describe it as ‘measured speed’.
- Of The shortest cycle was the 1997-2000 cycle, which lasted 7 months. (Total increases of 175 BPP).
How the starting point of the current cycle differs from previous cycles
In the table on page 3, we compare the current situation in terms of economic and fixed income markets with the starting point of previous walking cycles. Some key differences have been identified:
First, it is clear that the federation will take action much later than usual. And it certainly seems to be behind the curve (this was also highlighted inside). Fed Update – We expect a total of 200bp from 50 BP in March this year.February 14, 2022) Compared to previous cycles, inflation is very high, unemployment is low and ISM production is high, see also Fed Update – Different economies, different walking cycles – Comparing December 2015, February 3, 2022. In the Federal Defense, the situation was unusual due to the epidemic and inflation was not taken into account by most forecasts, including ourselves. In addition, the labor market is recovering well despite labor shortages, with employment at 2% lower than before the epidemic. However, the federation does not have the luxury of tolerating inflation and unemployment on a monthly basis. In addition, with fewer workers returning to the labor force than expected, the risk of permanent damage to GDP seems to be increasing.
Second, the federation is starting at the lowest level ever. Because rates are close to zero. The federation rose to the same level in December 2015 but was found to be the only walk and at first glance it seemed a policy error. We have not included it here because it is never the right cycle.
Third, the 2-10 curve (currently around 46 bp, is very flat compared to the beginning of previous cycles. When the walk began in 1999 (25 BP), the curve was more flat but by then the cycle had started at 4.75 percent. A.D. In 2004, the 2-10 curve reached its first hike at 187bp and in 2016 at 130bp.
Implications of different starting points
We believe that these differences have some important implications for this walking cycle.
- The walking cycle should be more loaded ahead Let the federation capture what is behind the spiral. That is why we want the Fed to start the cycle at 50 BP (for the first time since the 1980s) and monitor the pace at each meeting by 2022.
- ‘Active quantitative tightening (QT)’ will be seen for the first time in our view.. That is, in our view, the federation could sell bonds to reduce its accounting records from May. During the previous hike, the federation did only what it called ‘passive QT’ and reduced its revenues by re-investing in remittance bonds. If there is no “active QT”, the federation can see the reverse of the 2-10 curve at the beginning of the walking cycle because the starting point is a very flat curve to begin with. We believe that the reversal is a historical catastrophe and that the federation intends to postpone the coup as soon as possible. Many FOMC members have expressed concern about the reversal. You can sell long bonds to avoid this.
The above features are highlighted We are entering a territory without a charter. When it comes to Fed tight cycles. We will soon follow the paper on what the financial implications may be but all will be equal. We will look at the background behind the “active QT” and the increased risk of further risk of property damage due to the unrestricted approach being initiated by the federation.