Aurelia Butler

By Karen Brettell(Reuters) – With the Federal Reserve set to begin letting bonds mature off its $9 trillion balance sheet, the key metric to watch will be whether Treasury volatility picks up as a result in a market already suffering bouts of low liquidity.The Fed’s so-called quantitative tightening (QT) could also send yields higher, though analysts say this will depend on the direction of the economy, among other factors. The Fed will let bonds mature off its balance sheet without replacement starting June 1 as it attempts to normalize policy and bring down soaring inflation. This follows unprecedented bond purchases from March 2020 to March 2022, meant to blunt the economic impact of business closures during the pandemic.But as the world’s largest holder of U.S. government debt reduces its presence in the market, some worry the absence of its dampening effect as a consistent, price-insensitive buyer could worsen market conditions.“The impact of QT will be more evident in places like money markets and in market functioning as opposed to yield levels and curves,” said Jonathan Cohn, head of rates trading strategy at Credit Suisse in New York, adding that he will be watching “the way in which it proceeds through deposits, through the withdrawal of liquidity and through the added burden that it places on dealers.”The Fed is pulling back at a time when the Treasury market was already struggling with periods of choppy trading. U.S. government debt issuance has soared while banks face greater regulatory constraints, which they say has impeded their ability to intermediate trading.“On the margin we could see a little bit weaker liquidity in the Treasury market because there’s no opportunity to sell bonds from dealer balance sheets on to the Fed,” said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott in Philadelphia. “That might increase volatility, but liquidity is also already pretty thin within the rates space and that’s not necessarily directional.”Banks have reduced bond purchases this year. Some hedge funds have also reduced their presence after being burned by losses during bouts of volatility. Foreign investors have also shown less interest in U.S. debt as hedging costs rise and as an increase in foreign bond yields offers more options.To the degree that the Fed’s retreat does impact yields, it will most likely be higher. Many analysts thought the Fed kept benchmark yields artificially low and contributed to a brief inversion of the Treasury yield curve in April.“The risk is the market is unable to absorb the additional supply and you do have a big adjustment in valuations,” said Gennadiy Goldberg, senior U.S. rates strategist at TD Securities in New York. “We will still see more long-end supply than we did pre-COVID for quite some time, so all else being equal that should pressure rates a bit higher and the curve a bit steeper.”The direction of yields, however, will still be influenced by other factors, including expectations for the Fed’s interest rate hikes and the economic outlook, which could override any impact from QT.“From a top-down macro perspective we think other determinants will be just as or likely even more important for thinking about the direction of yields,” said Credit Suisse’s Cohn.The last time the Fed reduced its balance sheet it ended badly. Rates to borrow in the crucial overnight repurchase agreement market surged in Sept. 2019, which analysts attributed to bank reserves falling too low as the Fed ran down its balance sheet from Oct. 2017.That is less likely this time around after the Fed set up a standing repo facility that will function as a permanent backstop for the crucial funding market.There is also significant excess liquidity in the form of bank reserves and cash lent into the Fed’s reverse repurchase facility, which may take time to work through. Bank reserves stand at $3.62 trillion, up sharply from $1.70 trillion in Dec. 2019. Demand for the Fed’s overnight reverse repo facility, where investors borrow Treasuries from the Fed overnight, set a record at more than $2 trillion last week.The Fed is also taking time to ramp up to its monthly cap of $95 billion in bonds that it will allow to roll off its balance sheet each month. This will include $60 billion in Treasuries and $35 billion in mortgage-backed debt, and will fully take force in September. These caps will be $30 billion and $17.5 billion, respectively, until then.“It’s going to be very gradual… It’s just too soon to know what if anything the impact is going to be from QT,” said Subadra Rajappa, head of U.S. rates strategy at Societe Generale (OTC:SCGLY) in New York, noting that any issues may not begin to surface until the fourth quarter. (This story refiles to add “as” in the first paragraph) More

Other technologies could help to decarbonise the industry, meeting the same targets on emissions while preserving know-how and jobs in Italy, said Paolo Scudieri, the chairman of automotive industry association ANFIA.”I refer to the tangible contribution that biofuels and synthetic fuels, as well as hydrogen, can provide,” Scudieri said opening ANFIA’s public assembly, adding the Italian automotive industry was already making huge investments on hydrogen.Biofuels and synthetic fuels, referred to as e-fuels, are being developed to allow modified versions of combustion engines to continue to be used rather than a wholesale switch to battery electric vehicles (BEV).Scudieri said that exclusively focusing on BEV technology, currently dominated by Asian producers, would put some 73,000 jobs at risk in Italy in coming years, which would not be compensated by about 6,000 new jobs expected to be created by electric mobility.He added around 450 car parts maker in Italy, out of a total of 2,200, risk going out of business as they have not yet started to shift production towards electric technology.The European Commission has proposed a 100% cut in CO2 emissions by 2035 for the industry. The target, which is part of a bigger package of climate change policies launched last year, would make it impossible to sell new fossil fuel-powered vehicles in the 27-country bloc.The European parliament will hold a debate next week on a number of climate policies, including a plan to effectively ban combustion engine cars by 2035.Scudieri said there was not a prevailing position among different political groups within the European parliament.”Every single vote will count and my wish is that our MEPs will vote also having the country’s interests in mind,” he said. More

COLOMBO (Reuters) -Sri Lanka’s cash-strapped government on Tuesday announced a taxation overhaul to boost revenue amid the country’s crippling economic crisis, hiking value added taxes and corporate income tax, and slashing the relief given to individual taxpayers.Prime Minister Ranil Wickremesinghe, who took office this month and plans to present an interim budget within weeks, said measures were necessary as the current state of government finances was unsustainable.”The implementation of a strong fiscal consolidation plan is imperative through revenue enhancement as well as expenditure rationalization measures in 2022,” Wickremesinghe’s office said in a statement.Sri Lanka’s inflation rose to 39.1% in May, its statistics office said on Tuesday – a record level, compared to the previous high of 29.8% set in April.An increase in Value Added Tax (VAT) to 12% from 8% with immediate effect is among the key tax increases announced on Tuesday, which is expected to boost government revenues by 65 billion Sri Lankan rupees ($180.56 million).Other measures, including increasing corporate income tax to 30% from 24% from October, will earn an additional 52 billion rupees for the exchequer. Withholding tax on employment income has been made mandatory and exemptions for individual taxpayers have been reduced, the statement said.The island nation of 22 million people has been battered by its worst economic crisis since independence from Britain in 1948, with a severe shortage of foreign currency stalling imports of essentials, including food, fuel and medicines. The roots of the crisis lie in tax cuts enacted by President Gotabaya Rajapaksa in late 2019, which came months before the COVID-19 pandemic that battered the country’s lucrative tourism industry and led to a drop in foreign workers remittances.The tax cuts caused annual public revenue losses of about 800 billion rupees, the prime minister’s office said in its statement.The new tax regime and COVID-19’s impact, together with the pandemic relief measures, widened the budget deficit significantly to 12.2% of GDP in 2021 from 9.6% of GDP two years earlier.In an interview with Reuters this month, Wickremesinghe – who also holds the finance ministry portfolio – said he would cut expenditures down “to the bone” in the upcoming interim budget and re-route funds into a two-year relief programme.The tax hikes are aimed at putting public revenues back at pre-pandemic levels and focused on fiscal consolidation as the country seeks a loan package from the International Monetary Fund (IMF), said Lakshini Fernando, a macroeconomist at investment firm Asia Securities.”The tax increases are definitely a very positive first step, especially for IMF talks and debt restructuring,” Fernando said.”This was required to take forward discussions and will also help the government in talks with bilateral and multilateral partners to secure more funding,” Fernando said.($1 = 360.0000 Sri Lankan rupees) More

DUBAI (Reuters) – Israel signed a free trade agreement with the United Arab Emirates on Tuesday, its first with an Arab state and one which eliminates most tariffs and aims to lift their annual bilateral trade to more than $10 billion.It was signed in Dubai by Minister of Economy and Industry Orna Barbivai and her counterpart, UAE Minister of Economy Abdulla bin Touq Al Marri, after months of negotiations.Tariffs will be removed or reduced on 96% of goods traded between the nations. The UAE predicted the Comprehensive Economic Partnership Agreement would boost annual bilateral trade to more than $10 billion within five years.Emirati-Israeli trade stood at $1.2 billion in 2021, official Israeli data showed.Tariffs will be reduced on goods including food, medicine, diamonds, jewelry, fertilisers and other chemicals.Most duties are to be eliminated immediately, while others will be removed over 3-5 years. Some products will still be subject to customs tariffs but at a lower rate.Emirati trade minister Thani Al Zeyoudi said the deal had written “a new chapter in the history of the Middle East”.”Our agreement will accelerate growth, create jobs and lead to a new era of peace, stability, and prosperity across the region,” he wrote on Twitter (NYSE:TWTR).Barbivai said in a statement the expected strengthening in trade, removal of barriers and promotion of new business opportunities and partnerships would form a “solid foundation” for the “joint path” shared by Israel and the UAE.The trade agreement defined tax rates, imports and intellectual property, which would encourage more Israeli companies to set up offices in the UAE, particularly in Dubai, said Dorian Barak, president of the UAE-Israel Business Council .The council predicts there will be almost 1,000 Israeli companies working in or through the UAE by the end of the year. “The domestic market doesn’t represent the entirety of the opportunity. The opportunity is really setting up in Dubai, as many companies have, in order to target the broader region,” Barak told Reuters by phone.VIOLENCE CONDEMNEDThe agreement was signed amid Israeli-Palestinian violence. The UAE foreign ministry on Monday condemned what it called a “storming” of the Al Aqsa compound in Jerusalem by “extremist settlers under the protection of Israeli forces”. That appeared to refer to visits by thousands of Jews, who revere the site as a vestige of their two ancient temples, on the day marking Israel’s capture of Jerusalem’s Old City in a 1967 war. Some visitors prayed and held up Israeli flags which police said resulted in their removal.Al Aqsa, which is also the third holiest site in Islam, is in East Jerusalem’s Old City which Israel has annexed but is not recognised internationally.MORE DEALSThe deal marked the UAE’s second free trade pact after it signed a similar accord with India in February. It is in trade talks with several other countries, including Indonesia and South Korea.The UAE has sought to strengthen its economy and status as a major business hub following the coronavirus pandemic.Israel and the UAE established ties in September 2020 in a U.S.-brokered deal that broke with decades of Arab policy that had called for a Palestinian state before ties with Israel.Bahrain and Morocco recognised Israel the same year. More