While the economic environment stays turbulent, the crucial topics remain the war in Ukraine, the consequences of (planned) sanctions in the energy market, and the rise in interest rates. As some members of the FOMC flirted with a 75bps rate hike before the May meeting, market participants eagerly awaited the Fed’s interest rate decision last week.
I think you might have it wrong here, though: "Not long ago, the US government announced that it plans to issue fewer bonds this year to reduce the deficit. But as institutional investors are obligated to hold government bonds because of regulatory reasons, lower supply will also drive bond yields higher."
If supply dries up because fewer bonds are issued and demand stays the same for regulatory reasons, the price of bonds will rise and yields will fall instead of rise.
Great article, thanks!
I think you might have it wrong here, though: "Not long ago, the US government announced that it plans to issue fewer bonds this year to reduce the deficit. But as institutional investors are obligated to hold government bonds because of regulatory reasons, lower supply will also drive bond yields higher."
If supply dries up because fewer bonds are issued and demand stays the same for regulatory reasons, the price of bonds will rise and yields will fall instead of rise.
I think the regulatory changes are something that nobody is considering these days but is both likely and impactful