Once the Fed Starts Hiking

“One can discuss how decisive Fed’s QE has been for the equity market rally, but it clearly hasn’t been bad. Market expects a cut of the monthly bond purchases by USD10bn at each of the coming Fed FOMC meetings which means that QE ends in December.” (Carnegie)

S&P 500 & QE

“Signs the Fed could curtail its $85 billion of monthly purchases helped push the yield on 10-year Treasuries from 1.63 percent in May to about 3 percent in September. Some of us would have guessed that such a large move would have exposed certain players in the market’s excess leverage to those transactions that would have led to maybe some liquidations or some bankruptcies. An increase in the steepness of the yield curve, or the difference between short-term and long-term rates, may make markets more turbulent when the Fed begins raising rates. Carry trades, in which investors buy long-dated bonds and finance those purchases with short-term borrowing, are probably increasing with a steeper yield curve. Once the Fed starts hiking, the market reaction will be less stable. I would assume there are a lot more positions today in the market and the amount of leverage that you have in this part of the curve is higher.” (Pablo Salame, co-head of Goldman Sachs Trading Division)

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