NEW YORK – US Treasury yields tumbled on Tuesday as risk appetite languished amid lingering concerns about high inflation and the fast-spreading Delta coronavirus variant that could thwart global economic growth.
Investors were also cautious as the Federal Reserve’s two-day monetary policy meeting began on Tuesday. The US central bank is likely to stand pat on monetary policy but could discuss plans for tapering asset purchases during its Jackson Hole, Wyoming, gathering in August, analysts said.
“One thing about predicting Fed moves is to separate what you think they will do versus what you think they should do,” said Scott Skyrm, executive vice president in fixed income and repo at Curvature Securities in New York.
“If we are just looking at ‘should,’ I believe it’s time for the Fed to end QE (quantitative easing) purchases. Reverse repo volume is now over $900 billion a day. The liquidity the Fed is providing through QE is just recirculating back to the Fed via RRP,” he added, creating distortions in the Treasury market.
The Fed’s reverse repo window, launched in 2013, is used to mop up extra cash in the repo market and create a strict floor under its policy rate, or the effective fed funds rate, currently in a target range of 0 reuters-0.25 reuters.
The reverse repo volume soared to $927 billion on Tuesday, the second largest usage on record. Volume has surged this month after the Fed in June raised the rate it pays on reverse repos to 0.05 reuters from 0 reuters as part of technical adjustments to keep the fed funds rate from falling too low. – Reuters
