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Why are US nominal treasury yields falling sharply?

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Reserve Bank of India

In the June policy meeting, the Monetary Policy Committee (MPC) kept the policy rate unchanged and voted unanimously to maintain an accommodative stance, as long as necessary, to revive and sustain the growth on a durable basis. The MPC noted the downside risks to growth due to the rapid spread of the virus; policy statement had a dovish underpinning.

The RBI announced plans to implement GSAP 2.0 in Q2 FY2022 of INR 1.2 trillion, slightly higher than GSAP 1.0 of INR 1 trillion ( which will now include State Development Loans (SDL) purchases also ). RBI has committed to providing ample liquidity, and is looking to ‘turning systemic liquidity into equitable distribution’ across sectors.

We expect the RBI to keep its policy rates unchanged and stick to its accommodative framework for most of FY2022. RBI could take more measures for liquidity support to specific stressed sectors and to incentivize banks to increase credit offtake. In our best-case scenario, we see RBI moving towards normalising the policy going into Q4 FY2022, if there are indications that the pandemic has receded.

Federal Reserve

In the last policy meeting in June, the Federal Reserve Open Market Committee (FOMC) maintained the status quo on policy rates and its monthly QE programme but provided a more detailed hawkish guidance than expected. It raised its inflation projections for 2021 and signalled that it could hike rates by 50 bps in 2023.

In the July policy meeting, we do not see any major changes. However, we expect the Fed Chair to emphasize that the Central Bank is moving towards normalising the policy a bit, later in the year.

We think the FOMC will signal that it is ready to taper the policy in August, and commence such an action in Nov 2021. We see a rate hiking cycle, beginning in 2023 but acknowledge that it could come earlier than expected.

Bank Of England

In its last policy meeting in May, the BoE maintained status quo but surprised the market by announcing a small tapering in its weekly purchases programme, from GBP 4.4 billion prior to this policy meeting to GBP 3.4 billion over June-August.

In its upcoming policy meeting in June, we expect the BoE to maintain status quo and continue with its revised QE programme to provide as much support as possible to the real economy.

We think that BoE will move towards ending its QE purchases programme by end-2021. However, we expect it to keep the size of its balance sheet unchanged and not tighten the policy anytime over 2021-22.

European Central Bank

In the last policy meeting in June, the ECB maintained the status quo and refrained from tapering its purchases. It indicated that the weekly purchase programme will continue over Q32021. An upgrade was made to GDP growth projections but the outlook on inflation continued to remain fairly benign and dovish.

In the July policy meeting, we expect the ECB to continue to provide a dovish message, reinforcing the fact that the policy needs to remain accommodative and financial conditions need to remain easy.

The Pandemic Emergency Purchases Programme (PEPP) could get wound down by Mar 2022. However, we think there could be an increase in the size of the open-ended monthly QE programme, that could be announced later in 2021 or early in 2022, ensuring that the balance sheet expansion remains in place.

People's Bank of China

With the Chinese economy rebounding sharply from COVID-19, The People's Bank of China (PBOC) has moved from an accommodative liquidity regime to a neutral liquidity regime in 2021. Concerns about inflation and asset bubbles appear to have increased. However, policy rates/money market rates have been kept unchanged.

We expect the PBOC to maintain a neutral liquidity regime in Q2 2021 to Q3 2021 and keep its policy rates unchanged.

We expect the PBOC to move to a tightening regime going in to Q4 2021 and H1 2022 responding to a pick-up in the inflation and improvement in its growth. The policy rates might be kept unchanged but the Central Bank could drain the liquidity and raise short-term money market rates.

Over the years we have found ICICI bank Research to be quite insightful and actionable. The statistical and quant based observations in particular are unique and lend interesting perspectives. Forward looking research helps in forming a cross asset view.

TCS Treasury

Tata Consultancy Services

The research reports are very well structured, ideas clear and writing concise and argumentative. The literature review is comprehensive and you manage to successfully discuss the importance of your research, from a theoretical and an applied perspective.

HCL Technologies

Treasury @ HCL Technologies
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