Starting from next week, the market will be left without life support Starting from next week, the market will be left without life support Starting from next week, the market will be left without life support

Starting from next week, the market will be left without life support

Bonds
Althea Spinozzi

Head of Fixed Income Strategy

Summary:  This week marks the end of the Federal Reserve’s QE program. Next week, the market will be lacking the life support it received since March 2020, making it prone to volatility and tantrums. Ironically, the same week the Fed's balance sheet stops to expand, the market will need to weather a hawkish FOMC meeting and a possible Russian default.


This week is crucial for markets because it marks the end of life during the pandemic QE program. Since March 2020, the Federal Reserve has purchased nearly $6 trillion worth of mortgages and US Treasuries. This Wednesday, the central bank conducted its last purchasing operation in Treasuries, and it will conclude the last purchase of mortgage bonds today.

Although the Fed announced the end of the program plenty in advance, the market is underestimating the change that it will bring in financial markets starting from next week.

Indeed, starting from Monday, the market will test volatility amid a possible default of Russia and a hawkish Fed for the first time in two years.

There is another thing to consider: not only is the Fed expected to hike interest rates, but we might get news concerning its asset normalization policy, also known as quantitative tightening (QT). During January's FOMC meeting, the Federal Reserve flagged its willingness to start to wind down its balance sheet sooner than expected. It wouldn't be surprising to get more details about it next week, as a combination of rate hikes and quantitative tightening might help to tighten the economy more efficiently. Indeed, while rate hikes lift the front part of the yield curve, QT could initially help raise the long part of the yield curve, increasing borrowing costs. However, there is a critical point to make. Long-term yields rose initially during the 2018 QT cycle and then dropped amid volatility. The Fed had to stop QT all of a sudden as the situation in markets was deteriorating markedly.

We cannot exclude that the same will happen this time around, significantly since credit spreads have been widening on the rumors that a rate hike or QT was imminent. Both the CDX high yield and investment grade have risen above their 10-year average, while the Move Index remains sustained above levels previously seen during the Covid pandemic.

Everything points to a possible tantrum ahead of us, and now that support is all of a sudden taken away from under our feet, anything could spark it.

Source: Bloomberg and Saxo Group.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank (Schweiz) AG
The Circle 38
CH-8058
Zürich-Flughafen
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law.

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.