Eyes

Starting from next week, the market will be left without life support

Bonds
Picture of Althea Spinozzi
Althea Spinozzi

Head of Fixed Income Strategy

Summary:  This week marks the end of the Federal Reserve’s QE program. Next week, the market will be lacking the life support it received since March 2020, making it prone to volatility and tantrums. Ironically, the same week the Fed's balance sheet stops to expand, the market will need to weather a hawkish FOMC meeting and a possible Russian default.


This week is crucial for markets because it marks the end of life during the pandemic QE program. Since March 2020, the Federal Reserve has purchased nearly $6 trillion worth of mortgages and US Treasuries. This Wednesday, the central bank conducted its last purchasing operation in Treasuries, and it will conclude the last purchase of mortgage bonds today.

Although the Fed announced the end of the program plenty in advance, the market is underestimating the change that it will bring in financial markets starting from next week.

Indeed, starting from Monday, the market will test volatility amid a possible default of Russia and a hawkish Fed for the first time in two years.

There is another thing to consider: not only is the Fed expected to hike interest rates, but we might get news concerning its asset normalization policy, also known as quantitative tightening (QT). During January's FOMC meeting, the Federal Reserve flagged its willingness to start to wind down its balance sheet sooner than expected. It wouldn't be surprising to get more details about it next week, as a combination of rate hikes and quantitative tightening might help to tighten the economy more efficiently. Indeed, while rate hikes lift the front part of the yield curve, QT could initially help raise the long part of the yield curve, increasing borrowing costs. However, there is a critical point to make. Long-term yields rose initially during the 2018 QT cycle and then dropped amid volatility. The Fed had to stop QT all of a sudden as the situation in markets was deteriorating markedly.

We cannot exclude that the same will happen this time around, significantly since credit spreads have been widening on the rumors that a rate hike or QT was imminent. Both the CDX high yield and investment grade have risen above their 10-year average, while the Move Index remains sustained above levels previously seen during the Covid pandemic.

Everything points to a possible tantrum ahead of us, and now that support is all of a sudden taken away from under our feet, anything could spark it.

11_03_2022_AS2
Source: Bloomberg and Saxo Group.

Quarterly Outlook

01 /

  • Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    Quarterly Outlook

    Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    John J. Hardy

    Global Head of Macro Strategy

  • Equity Outlook: The ride just got rougher

    Quarterly Outlook

    Equity Outlook: The ride just got rougher

    Charu Chanana

    Chief Investment Strategist

  • China Outlook: The choice between retaliation or de-escalation

    Quarterly Outlook

    China Outlook: The choice between retaliation or de-escalation

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: A bumpy road ahead calls for diversification

    Quarterly Outlook

    Commodity Outlook: A bumpy road ahead calls for diversification

    Ole Hansen

    Head of Commodity Strategy

  • FX outlook: Tariffs drive USD strength, until...?

    Quarterly Outlook

    FX outlook: Tariffs drive USD strength, until...?

    John J. Hardy

    Global Head of Macro Strategy

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...

Content disclaimer

None of the information provided on this website constitutes an offer, solicitation, or endorsement to buy or sell any financial instrument, nor is it financial, investment, or trading advice. Saxo Bank A/S and its entities within the Saxo Bank Group provide execution-only services, with all trades and investments based on self-directed decisions. Analysis, research, and educational content is for informational purposes only and should not be considered advice nor a recommendation.

Saxo’s content may reflect the personal views of the author, which are subject to change without notice. Mentions of specific financial products are for illustrative purposes only and may serve to clarify financial literacy topics. Content classified as investment research is marketing material and does not meet legal requirements for independent research.

Before making any investment decisions, you should assess your own financial situation, needs, and objectives, and consider seeking independent professional advice. Saxo does not guarantee the accuracy or completeness of any information provided and assumes no liability for any errors, omissions, losses, or damages resulting from the use of this information.

Please refer to our full disclaimer and notification on non-independent investment research for more details.
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International

All trading and investing comes with risk, including but not limited to the potential to lose your entire invested amount.

Information on our international website (as selected from the globe drop-down) can be accessed worldwide and relates to Saxo Bank A/S as the parent company of the Saxo Bank Group. Any mention of the Saxo Bank Group refers to the overall organisation, including subsidiaries and branches under Saxo Bank A/S. Client agreements are made with the relevant Saxo entity based on your country of residence and are governed by the applicable laws of that entity's jurisdiction.

Apple and the Apple logo are trademarks of Apple Inc., registered in the US and other countries. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.