Original title: Fed raises interest rates and moves into US mid-segment debt gradually begins to gain long-term allocation value
21st Century Business Herald reporter Tang Jing reported in Beijing
The event attracting the most attention from the market this week is that the Federal Reserve will announce the Fed’s interest rate decision in the early morning of September 22 (Thursday) Beijing time, as well as a dot plot of interest rates and economic forecasts and future prospects. employment data. Given that US headline inflation data in August fell, but the increase was still above expectations, while employment, consumption and other data remained strong, the overall market is expect the Fed to raise interest rates for the third consecutive time this week by 75 basis points.
Fed funds futures show an 82% chance of a 75 basis point rate hike in September and an 18% chance of a 100 basis point hike. Taking into account that the market has fully priced in the Fed’s 75 basis points, not the increase tomorrow’s rate is the focus of this meeting.
Bai Xue, an analyst at Oriental Jincheng Research and Development Department, told the 21st Century Business Herald reporter that the focus of this interest rate meeting is the median interest rate suggested by the interest rate dot plot released after the meeting and the rhythm of the future interest rate rises. According to the proposed schedule, the Fed only releases the latest economic data forecasts for Fed policymakers after the four meetings at the end of the quarter, in March, June, September and December, as well as a dot plot in represent their respective expectations for the level of interest rates in the next few years.
The Fed was expected to remain hawkish
The dot plot is said to be a map of the Fed’s prediction of future interest rate increases or interest rate cuts, and is a form of forward-looking information. The dot plot was issued because the Fed felt that it was communicating too little with the market and that the market sometimes did not understand its message. Therefore, the Fed hopes to strengthen communication with the market by publishing the dot plot.
Each filled dot on the dot plot represents a Fed member’s forecast for future interest rates. When the Fed publishes a dot plot, it publishes the median rate, which represents the Fed’s forward rates in the future. As well as predicting the interest rate at the end of the year, members also need to predict the interest rate in the next few years and long term, so the dot plot is a window for the market to see the future path of the Fed’s monetary policy . to some extent.
Fed June Dot Plot
Bai Xue believes that given that the Fed chose to return to a hawkish stance after August in order to quickly stabilize inflation expectations, the September meeting may further weaken market expectations for “the end of interest rate hikes”. to combine monetary policy tightening signals. The resulting “inflation-reducing effect”, for example, can use more phrases like “the interest rate rise has not reached the end”.
She also expects that the median projection for the federal funds rate at the end of 2022 and 2023 in the September dot plot should rise further than in June. The June meeting’s median expectations for interest rates at the end of 2022 and 2023 were 3.25%-3.5% and 3.5%-3.75%, respectively. The meeting may raise the median interest rate forecast to around 4% and 4.5% by the end of 2022 and 2023, respectively.
Regarding the forecast of a 100 basis point interest rate hike in the market, Bai Xue believes that a 100 basis point interest rate hike is an unexpected and super intense interest rate hike. Considering the communication between the Fed and the market before the interest rate meeting, it should not be at the current Fed meeting. Interest rate rises are considered.
Zhou Junzhi, head of macro at Minsheng Securities, believes that the Fed’s September interest rate meeting is expected to significantly adjust the dot plot, which will also mark the end of the Fed correcting the market’s interest rate hike expectations, and the Fed can resume leading the market interest rate curve. From a longer-term perspective, in the process of US CPI data peaking and falling, the Fed is pursuing more continuation of interest rate increases. A single rate hike that exceeds market expectations is no longer an appropriate choice, as it runs counter to the Fed’s repeated emphasis on “fighting inflation more robustly and for a longer time to achieve a soft landing of the economy”.
In Bai Xue’s opinion, although the current CPI has started to decline, the absolute level is still far beyond the “comfort zone” of the Federal Reserve. The core service inflation represented by housing rents may still to be sticky, and US inflation may still be. be in the process of breaking the top in the third quarter Although the downward trend of general inflation year on year this year is relatively certain, it is difficult for it to fall significantly. We expect this to increase the pressure on the Fed not to ease the pace of tightening in the near term. In November, December, and even the first half of next year, the pace of interest rate hikes may not stop until inflation has fallen.
US debt is gradually starting to have a long-term allocation value
Recently, fueled by hawkish interest rate hike expectations, US bond yields have continued to rise strongly. As of September 20, US 10-year bond yields have exceeded 3.5% and surged to an 11-year high years of 3.57%.
Zhang Jiqiang of Huatai Securities believes that US bond yields have continued to rise recently, and the 10-year term has once again exceeded 3.5%. Under the logic of a global ratio differential, US bonds have started to have an allocation value. In a horizontal comparison, the yield on the 10-year Treasury bond is clearly superior among traditional safe assets, even surpassing the high-grade credit bonds of some countries; in a historical vertical comparison, the 10-year US Treasury bond is flat. a relatively high level in nominal and high real interest rates. However, the Fed’s continued interest rate hikes are still the most important downside risk for US bond yields. The Fed’s policy rate may reach 4.5% or even higher, and US bond market liquidity will continue to decline under the acceleration of shrinkage. balance sheet It is not ruled out In the short to medium term, there is the possibility of further turbulence.
Bai Xue pointed out to reporters that in terms of US debt, in the short and medium term, the market expects that “the cycle of interest rate hikes will continue for a longer period and the policy interest rate endpoint will higher” the US bond is higher. yields are still likely to rise further, and US bond prices have yet to bottom.
However, in the long term, as the fundamentals of the US economy weaken and inflation gradually declines, it is more certain that the prices of interest rate rises will also fall The safe haven advantage of US 10-year bonds as a traditional safe the asset will is highlighted further. US 10-year bond yields are even higher than high-grade credit bonds in some countries, and US bonds will have a higher allocation value. In addition, from the historical level, the US 10-year bond yield is at a relatively high level in both nominal and real interest rates, which is also an angle that supports the value of the long-term configuration of US bonds.
According to the previously quoted 21st Century Business Herald reporter Xia Chun, chief economist of Yinke Holdings, “The timing and investment strategy of China’s increase in US bond holdings in July were well understood. On the one hand, the dollar index continued to strengthen, which caused the exchange rate of rising US bond holdings to increase to the heights , the demand for a safe haven US bond allocation has begun to increase, and the price of US bonds is expected to rebound. More importantly, current US Treasury bond yields have clearly deviated from the long-term trend, and signs of oversold are becoming increasingly apparent. “
Wu Zhaoyin, director of macro strategy of AVIC Trust, analyzed to reporters that the current bear market of US bonds has not ended, but the allocation time is indeed approaching. According to the Fed statement, the future US inflation rate (measured by CPI) will decrease from the current 8-9% to 2%, then the future US benchmark interest rate will rise to 4 -5%, while the current benchmark federal interest rate is 2.25% -2.5%, it can be said that the US interest rate increase has entered the middle stage, and it is also the most difficult stage. There will be rate hikes interest in the next few times very much, and with the rapid increase in interest rates, the impact of interest rate increases on the economy and the capital market will increase.
Wu Zhaoyin pointed out that according to the relationship between the US Treasury bond yield and the federal benchmark interest rate during the historical US interest rate hike process, the Treasury bond yield will lead the change in the federal benchmark interest rate. Well, the current US federal benchmark interest rate has entered the mid-term phase, and the yield on the corresponding US Treasury bonds has risen into the mid-to-late period, but it has not reached its peak. Therefore, the US Treasury bond market bear market is not over yet, and has not entered the fully configurable stage.
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