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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Investors’ hopes for a strong year for US Treasuries have been boosted by signals that the Federal Reserve could soon slow the wind-down of its balance sheet.In the minutes of the central bank’s December meeting, published this week, some officials suggested the Fed review its policy of shrinking its balance sheet, known as “quantitative tightening”.A pivot from the Fed, as it considers cutting rates from their current 22-year high of 5.25-5.5 per cent, could bolster Treasuries’ prices and reduce volatility in a market that has been unsettled by a deluge of supply. The central bank has in recent years been the biggest buyer of US government debt.“This is a tailwind for the bond market. It should help us,” said Bob Michele, chief investment officer and head of the global FICC group at JPMorgan Asset Management. The end of QT would remove “a concern for investors who are sitting in cash, wondering if they should come into the bond market”.After pumping trillions into the financial system to stabilise the economy at the start of the coronavirus pandemic, the Fed began slimming its balance sheet from $9tn in May 2022 to help contain the worst surge in inflation since the 1980s.Since ending its bond purchases, the size of its holdings of official sector debt has fallen to $7.2bn. Now, with price pressures seemingly under control — and rate cuts looming — the text of the minutes show some policymakers want a discussion on the circumstances under which those QT plans can be revised.“This seems like a first step towards ending QT,” said Joseph Abate, a strategist at Barclays. The nascent signs of a debate come as the Treasury department has borrowed more to cover a widening budget deficit, which stands at $1.7tn. The surge of US government bond issuance in the second half of 2023 helped drive Treasury yields to their highest levels in more than a decade, and waning demand from big banks and foreign investors was expected to worsen the effects this year.“This will bring down the volatility of the rates market,” said Rick Rieder, chief investment officer of global fixed income at BlackRock. “One of the risks this year was the big auctions that Treasury had to execute on. When you have to do such big auctions when the Fed is doing QT, you have risks. This lowers some of [those] risks.”An end to QT would reduce the amount of debt Treasury needs to issue to private investors this year. Excluding Treasury bill issuance — the short-term debt that matures in anywhere from a few days to a year — issuance this year is expected to be $1.8tn if QT ends in June, versus $2.1tn if it ends in December, according to estimates from Meghan Swiber, a US rates strategist at Bank of America. A New York Fed survey of Treasury dealers published on Thursday suggested that, as of December, big banks had been expecting the Fed to end QT in the fourth quarter of 2024. Following the publication of the minutes, some investors, including Michele, now expect the run-off to end by summer. Other Fed watchers are more cautious about expecting a decision so fast. A shift in QT policy comes as central bank officials have indicated they are likely to make three quarter-point rate cuts this year, calling time on a series of rate rises aimed at tackling soaring inflation.“There’s a desire to avoid any sort of liquidity stress at a point when the Fed is going to be pivoting from what has been a historic tightening cycle,” said Gregory Daco, chief economist at EY. “We know that these pivot points tend to be a sensitive time for markets.” Officials have previously said that the Fed would determine when to end QT by assessing the level of reserves in the financial system — as well as a range of money market indicators, such as the spread between private lenders’ funding costs and official interest rates. The Fed currently rolls off up to $60bn in Treasuries and $35bn in mortgage-backed securities each month. “Talk of QT is quite premature,” said Drew Matus, chief market strategist at MetLife Investment Management. “The balance sheet remains bloated relative to [gross domestic product]. You need to shrink it so that, if there’s another downturn at some point, you can restart quantitative easing.” QT’s end would likely be gradual, with the Fed expected to increase the portion of the debt holdings it reinvests over several months. That process could be doubly beneficial for Treasuries, as the Fed is likely to reinvest both its maturing Treasury bonds, and its maturing mortgage-backed securities into the Treasury market, said Swiber. That’s because the Fed has said that it is ultimately interested in having only Treasury debt on its balance sheet. An early end to QT may also ward off fears of a repeat of the 2019 crisis in the repo market, when the Fed last tightened its balance sheet. Then, rates in short-term funding markets jumped after a sudden drop in reserves, ultimately forcing the Fed to intervene in the market. While reserves are still ample and there are not clear signs of stress in the market, overnight funding rates have been creeping higher. “This points to a Fed that wants to err on the side of caution,” said Mike de Pass, global head of rates trading at Citadel Securities. “It’s also important to remember how poorly it ended last time.” More

(Reuters) – U.S. corporate bond market issuance is projected to slow next week from a hectic start to the year after economic data sent mixed signals on Friday but tempered expectations of an interest rate cut in March.The first week of 2024 saw nearly $59 billion in high-grade bond issuance, beating forecasts of $50 billion to $55 billion. The rush was led by top-rated companies aiming to take advantage of relatively lower borrowing costs due to a tightening of credit spreads, the premium charged over Treasuries, and decline in Treasury yields at the end of 2023.They were met with strong demand as investors aimed to lock in yields that may not be available if the Federal Reserve starts to cut U.S. interest rates later this year.But economic data releases on Friday sent mixed signals and led to sharp moves in Treasury yields. Yields hit three-week highs early in the trading session and then nosedived, taking the 10-year Treasury back below 4%.The volatility in yields and release of bank earnings next week could limit supply for new bonds.”Next week is going to be pretty light, pretty moderate in comparison,” said Guy Lebas, chief fixed income strategist at asset manager Janney Capital Management. Bond syndicate desks expect $35 billion on average in issuance next week, according to Informa Global Markets.As such, these desks expect a steady flow of new bond issuance in January as borrowing costs were still lower than the fourth quarter of 2023.Investment-grade index yields averaged 5.3% on Jan. 4 compared to 5.88% in the fourth quarter, according to ICE BAML data.Dan Krieter, director of U.S. investment grade strategy at BMO, noted companies would save nearly 85 basis points now compared to October and November when yields averaged 6.13%.  Investors are still attracted to high-grade bonds, as seen in $5 billion that flowed into related funds and ETFs for the week ended Jan. 3, according to a BoFA Global research note.That was higher than $3.15 billion the prior week and the biggest weekly inflow since July. More

A second banking source with knowledge of the Thursday evening meeting said the government spoke “of its intention” of swapping local debt maturing in 2024 for notes maturing in 2025 and through 2027, in a peso amount that could reach the equivalent of $71 billion. The source said no specific amounts were discussed for the debt management.”There wasn’t and isn’t a concrete proposal. The economic program was presented and there was an exchange of ideas regarding liability management,” the ministry source said. Earlier on Friday, Bloomberg News reported on the debt swap, saying the government could issue new peso bonds in February to swap for the 2024 maturities.A third banking source said the recently appointed Argentine government has been exploring several options to clear their short-term external liabilities. “It is part of the economic adjustment along with negotiations with the IMF and passage of important reforms,” the source said.Argentina and the International Monetary Fund were due to begin meetings on Friday to discuss a delayed review of their $44 billion program. More

NEW YORK (Reuters) – A potential ending to the Federal Reserve’s balance sheet reduction measures this year bolsters the case for Treasuries to extend their 2023 rally, investors said, though many believe factors such as fiscal concerns could counterbalance gains. Minutes from the Fed’s Dec. 12-13 policy meeting, released earlier this week, showed some officials are already discussing what it would take to end the shrinkage of the central bank’s cash and bond holdings.That process, known as quantitative tightening, has seen the Fed’s balance sheet contract by nearly $100 billion per month as it allows Treasury and mortgage bonds it owns to mature and not be replaced. In doing so, it has reduced its balance sheet by just over $1 trillion, to $7.764 trillion on Dec. 27, complementing the aggressive rate increases it started in early 2022.Some market participants said perceptions that an end to quantitative tightening was approaching could be another positive factor for bond markets in a year during which the Fed is expected to cut interest rates after a tightening cycle that saw them rise 525 basis points. Yields on the benchmark 10-year Treasury, which move inversely to prices, have plunged over 100 basis points from 16-year highs hit in October on anticipation of rate cuts. That reversal spared bond markets for what could have been an unprecedented third straight year of declines.Still, factors such as widening fiscal deficits – estimated to hit $20 trillion in the coming decade – and possibly lower demand for U.S. Treasuries from large foreign buyers are likely to keep bond prices from rising too far, market participants said.”The slowing down of quantitative tightening is a positive, but I think the deficit situation is worse,” said Vishal Khanduja, co-head of broad markets fixed income at Morgan Stanley Investment Management.Meanwhile, timing the end of QT could be difficult, as it may not necessarily coincide with reductions in interest rates.Analysts at Deutsche Bank said on Thursday the Fed may end QT as early as June if it starts cutting interest rates in response to a possible recession – an economic scenario the bank’s strategists forecast for this year. On the other hand, the Fed could extend QT into next year if the economy experiences a so-called soft landing, where inflation cools and growth remains resilient, the bank said. A more conservative view came from so-called primary dealers. Wall Street’s biggest banks – surveyed before the Fed’s Dec. 12-13 meeting – predicted policymakers would end balance sheet reduction in December 2024, later than they had previously forecast. The results of the survey were released on Thursday. Matthew Miskin, co-chief investment strategist at John Hancock Investment Management, said the Fed’s balance sheet measures are likely to continue running in parallel with changes in interest rates. However, economic data such as Friday’s better-than-expected jobs report argue against balance sheet reduction in the near term, he added.While an unwind of quantitative tightening could provide a measure of support for bonds, “quantitative policy is a piece of the puzzle, but frankly not as big of a piece as is often considered,” he said. More

For close to a century, Toyota prided itself on its ability to constantly trim the costs of making its complex, highly engineered vehicles. But when Takero Kato, the head of the Toyota division tasked with building electric vehicles, travelled through China in 2018 he was shocked by what he found. “For the first time, I came face to face with the competitiveness of Chinese components,” he told the company’s internal newspaper, Toyota Times, in November. “Laying eyes on equipment that I had never seen in Japan and their state of the art manufacturing, I was struck by a sense of crisis,” he recalled. “We’re in trouble!”Kato was right to worry. Last year China overtook Japan as the world’s biggest auto exporter, with data from Shanghai-based advisory firm Automobility showing Chinese auto exports have nearly quintupled since 2020 to approach 5mn last year.In the final quarter of 2023 BYD, the Shenzhen-based company backed by Warren Buffett’s Berkshire Hathaway group, outsold Tesla for the first time, sending a powerful warning signal to the global auto industry. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.BYD’s sales come mostly from the domestic market, which it dominates. But the group is one of several Chinese EV makers turning their sights to foreign shores. China’s entrants — from publicly listed BYD to state-owned Chery — plan to use new regional operations in places like Hungary and Mexico to enter western markets with cheaper electric models, securing their global dominance and challenging storied incumbents such as General Motors, Ford and Volkswagen. “No one can match BYD on price. Period,” says Michael Dunne, chief executive of Asia-focused car consultancy Dunne Insights. “Boardrooms in America, Europe, Korea and Japan are in a state of shock.”While the US government has responded with a slew of subsidies to encourage domestic manufacturing, the prospect of millions of low-cost, high-tech cars made by Chinese companies hitting European shores poses a dilemma for lawmakers there.A flood of cheap Chinese car imports could be disastrous for Europe’s incumbent carmakers, with the EU already considering import tariffs to limit the damage. BYD electric cars waiting to be loaded on a ship at a Chinese port. BYD exported nearly 250,000 cars last year More

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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.It is, on the face of it, a paradox. Markets in October were mired in pessimism as inflation remained stubbornly high and investors feared that central banks would keep policy interest rates higher for longer. By December, those same markets were gripped by euphoria thanks to seemingly dovish statements on interest rates by Federal Reserve chair Jay Powell that appeared to promise earlier rate cuts than previously expected. And now in January, equity markets have made a rocky start to the year.The key to understanding these extreme swings in sentiment is to be found in the mechanics of data dependent monetary policy. This causes investors to revise and re-revise endlessly their trading strategies based on intense parsing of central banking rhetoric and on expectations of how ageing incoming data of variable quality will influence central bankers’ rate setting.Within this backward-looking, shaky policy framework, short-termism is endemic. And the risk is that markets overlook longer term fundamentals. That risk will be especially high in 2024, which will witness continuing reversals in longstanding economic trends.Despite the markets’ cheery recent assumption about waning inflation, the protracted era of ultra-low interest rates is surely over. Yes, short-term rates will fall in 2024 as inflation continues to decline. But the longer term is another matter.For a start the central banks’ commitment to shrink their balance sheets after the extended period of quantitative easing means that they will be withdrawing their buying power from public markets just as government borrowing requirements are running at peak levels.A broader threat to the Panglossian “free lunch” view of government debt born of negligible real interest rates since the 2007-09 financial crisis relates to the reversal of several positive supply shocks to the world economy since the 1980s. The most important concerns the impact of the rise of China and other emerging markets on the global labour market. This led to a glut of labour that depressed wages in the developed world. One result was reduced investment as companies substituted labour for capital, which helps explain the dismal productivity record since the crisis. Another was quiescent inflation (for which central bankers breezily took credit).Yet now the global labour force is shrinking. Since the pandemic labour’s bargaining power has increased and will increase further as workforces go on shrinking in ageing advanced countries and also in China and Korea. The surge in wages now encourages companies to substitute capital for more costly labour.Other economically benign effects of globalisation such as cross-border supply chains are being de-risked in the face of geopolitical confrontation. This brings resilience at the cost of economic efficiency. Meantime, protectionism is on the rise. All of which is dismal news for growth.Harvard’s Kenneth Rogoff argues that even if inflation declines it will probably remain higher for the next decade than in the decade after the financial crisis. He cites factors including soaring debt levels, increased defence spending, the green transition and populist demands for income redistribution. Hard to argue with that, although there is an open question as to how far technologies such as artificial intelligence might offset these inflationary pressures.Do not expect China to come to the rescue on either the growth or inflation front as it did after the financial crisis. Its former growth model, substantially driven by the property market, is structurally challenged now and China is expected henceforth to import less. One of the most profound impacts from the reversal of ultra loose monetary policy turns on the profitability and finances of the corporate sector in the advanced countries. A study by the Fed’s Michael Smolyansky shows lower interest expenses and corporate tax rates explain more than 40 per cent of the real growth in corporate profits from 1989 to 2019 for S&P 500 non-financial firms.That is an eye-catchingly large number and the picture will be similar across the developed world. In today’s fiscal bind, the scope for more corporate tax cuts is minimal and interest rates are not going back to near-zero. So prepare for a long-run slowdown in corporate profits growth and stock returns.After these great reversals the new normal for investors will include a very challenging monetary landscape with heightened volatility and higher long bond yields than in recent years. Against a background of burgeoning public debt, stringent official interest rates now contribute to uncomfortably high government borrowing costs.Political pressure on central banks may thus intensify. Meantime higher rates and bond yields in the no longer ultra-loose monetary regime will impose continuing strains on the financial system, putting the central banks’ goals of inflation control and financial stability potentially in conflict. It seems questionable whether market practitioners have taken all this toxic matter on [email protected] More