Compelling Case for Continuation
Weathering the Storm
Heading into Q1, the key risks identified were: (1) A potential QRA supply shock, as long-term interest rates could surge due to a possible shift in bond issuance towards longer-duration securities, (2) the repricing of interest rate cuts, as the Federal Reserve downplayed expectations regarding the timing and frequency of such cuts, and (3) concerns regarding the dynamics between the expiration of the Reverse Repurchase Agreement (RRP) and the conclusion of Quantitative Tightening (QT) – specifically, if the RRP, a current liquidity source in the market, were to be depleted while QT persisted, this could result in a reduction of bank reserves below the minimum level deemed necessary for the banking system.
In recent weeks, we have successfully navigated these risks, potentially supported by additional inflows from the newly introduced spot ETFs.
As noted last week, the market responded positively to a coupon intensive QRA, indicating that demand for coupons at these levels exceeded expectations. This suggests that the market had effectively anticipated the treasury coupon issuance in advance. Since mid-January, there has been a significant shift in Fed funds futures. They have now largely discounted the previously anticipated aggressive rate cuts, currently ...