It is true that the Fed will not play with interest rates in the FOMC decision to be announced Wednesday night this week. However, I wonder if starting from the global bond market that also includes Hedge A (GOP) of Turkey’s Emerging Markets, Will took a step to avoid panic. At the CBRT MPC meeting to be held one day after the Fed, the interest rate decision is largely related to the Fed’s steps.
The damage is growing in emerging markets
Last week, for the first time since October, hot money leaks from the GOP were observed, while the currency index of emerging markets (developing countries) fell to the bottom of the last 3 months against the dollar. According to Reuters, several giant global funds slashed the Republican Party’s positions, while stocks also fell 9% from the beginning of the year.
Most pundits following the US bond market now expect GDS 10-year yields to rise to at least 2%, which is still 1.62% mid-year. If the EU and the US grow in the framework of vaccination campaigns, Japan and Brazil, South Africa, Russia, if better pefrormans from major developing countries like Turkey are exhibited, the US bond yields In 10 years they can go much higher.
ING Bank: Fed does not take control of the yield curve
ING Bank experts note in their reviews titled “US: What to Watch for the Fed’s March Meeting” that the Fed is also uncomfortable with the bond market turmoil. However, the FOMC does not appear to have any intention of increasing its bond purchases. The Fed can give a clear message that it will continue to buy that bad for a long time and keep interest rates at zero to support the bond market, but it will not take action until the June meeting.
Velakin Fed can indirectly support the bond market in two ways. First, it could prevent the sale of $ 600 billion bonds by extending legislation suspending the cap on commercial banks’ government securities portfolio, which is set to expire at the end of the month.
Second, the guaranteed overnight financing rate (SOFR), which will soon replace LIBOR, has been reduced to 1-2 basis points due to the lack of a buyback guarantee, giving the markets the wrong message. . This is technical, but the SOFR is expected to be around 12.5 basis points. To achieve this, the Fed can increase the interest banks pay on their free reserves or expand the guarantee package for repos.
These moves are steps to anchor the short end of the US yield curve where the Fed wants it. According to ING, the Fed does not intend to intervene in the 10-30 year returns.
What will the CBRT do?
This scenario is very important for the CBRT, because the disturbance in the US bond market is driving the dollar / TL to escape the GOP. The Fed’s decisive start to suppress US 10-30 year bond yields will either halt the CBRT rate hike or reduce its amount. In the opposite scenario, the CBRT will have to raise interest rates. While polls of economists predicted a 100 bp rate hike, it would be 300 bp more accurate against political risks like the looming S-400 dispute.
Let’s say it “goes bad” on Wednesday and Thursday.
ANALYSIS: Daily nervous crisis in the US bond market.
Reuters poll: 19 out of 20 institutions expect an increase in interest rates