QT: how balance sheet reduction (if/when realized) *SHOULD* lead to a higher term premium ... and what then of 2s10s ...
KC Fed research note
This brought to my attention from the authors of what happened,
Treasuries have extended losses while the curve is little changed as the Fed debates rate hikes versus balance sheet reduction. There was little new news overnight (see above) to distract global investors from yesterday's Fed Minutes release. DXY is UNCHD while front WTI futures are showing +1.5%. Asian stocks fell (NKY -2.88%), EU and UK share markets are roughly -1% lower while ES futures are little changed as of 7:30am. Our overnight US rates flows saw initial bottom-feeding during Asian hours that led to later stop-outs after the NY session lows were eventually taken out. Turnover was brisk and it was in London AM hours too with better selling in off the runs partly balances by reserve manager buying in the long-end. Overnight Treasury volume was really solid at ~270% of their rolling average.
It strikes me as a bit academic (we live in returns based world and things like ‘term premium’ and other models strike me as best effort guesses from those in academia who’ve never reported in to fiduciaries or lived / died by the markets movements.
Nevertheless, those in the markets always looking for better mousetrap (model) or guess as to what lies ahead for things like term premium and when those who help craft policy have something to offer, well, we read. This from the while we slept guys,
… UST 2s10s curve, daily: We added this to highlight the minor range breakout steeper in recent days and to show the regime boundaries that we'd guess are decent support and resistance levels for this curve. Overhead you have the former range floor near 96bp as your topside resistance for this curve and it does look headed there to us. Of course, the now-evolving debate over policy sequencing will help to drive this curve with a year-ago KC Fed research piece noting how balance sheet reduction, if or when realized, should lead to a higher term premium
This visual came with a link TO KC FED PAPER released 04 Jan so I thought it might be of some help for those who are like me, and still awaiting HIMCOs Q4 note to drop.
HERE is the link which will bring you TO KC FED WORKING PAPER — from April 2021 and recently updated (DEC 2021)