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AUSSIE 3-YEAR TECHS

(Z1) Sell-Off Abates

AUSSIE BONDS

Parallel Shift In Futures Overnight

RBNZ

VIEW: ASB Looking For Higher Peak In OCR

ASIA

Coming up in the Asia-Pac session on Thursday:

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St Louis Fed Pres Bullard - arguably the FOMC member currently making the most hawkish calls for monetary policy normalization - told Reuters in an interview out today that he's looking for an aggressive taper and two rate hikes in 2022 (the latter may be a one-hike upgrade from liftoff in Q422 which he said last month he was pencilling in).

  • But more provocative is his view that the Fed should allow the balance sheet to begin shrinking once the taper is finished next year, by slowing/ending reinvestments.
  • This is a topic that hasn't come up much with FOMC officials but it's arguably as or even more important than the taper itself.
  • Reinvestment of maturing proceeds/coupons is expected continue for some time – as we wrote in our Fed Balance Sheet Tracker in July, a reasonable guess at this point for starting to shrink the balance sheet is not until 2025 at the earliest.
  • Reinvesting MBS proceeds, for instance, would basically mean the Fed buying $50B a month, by some rough estimates. How much of that would be reinvested in Treasuries and how much in MBS is another question.
  • Expect this to become a very important point of discussion in the next couple of months as the taper gets underway. It will be interesting to see if it was discussed at the September meeting (Minutes are out Oct 13),