21 Apr Fixed Income Perspectives ‘Reading the FOMC Tea Leaves’
Voya Investment Management – Fixed Income Perspectives – April 2017
Despite expectations of a weak first-quarter GDP print and recent lackluster jobs reports, the Federal Open Market Committee (FOMC) signaled in its latest meeting minutes that it still intends to continue policy normalisation through various means. While interest rate hikes have dominated the spotlight, ending its balance sheet reinvestment policy and normalising the size of its portfolio appeared to be further down the road, until now. FOMC participants generally agreed that it would be appropriate to start phasing out reinvestments by “later this year,” with a possible start date in December at the earliest. Given its magnitude, the FOMC stressed that a “gradual and predictable” reduction of its balance sheet is favored; to minimise market volatility, reinvestments in both U.S. Treasuries and agency mortgage-backed securities (MBS) will likely be phased out over time. What does this mean for bond markets and for bond portfolios?