The Federal Reserve at its December meeting began plans to start cutting the amount of bonds it is holding, with members saying that a reduction in the balance sheet likely will start sometime after the central bank starts raising interest rates, according to minutes released Wednesday.

While officials did not make any determination about when the Fed will start rolling off the nearly $8.3 trillion in bonds it is holding, statements out of the meeting indicated that process could start in 2022, possibly in the next several months.

“Almost all participants agreed that it would likely be appropriate to initiate balance sheet runoff at some point after the first increase in the target range for the federal funds rate,” the meeting summary stated. (CNBC – Continue Reading)

Italy is out of the traps fast in 2022 with a new 30-year syndicated bond. It's a bold move as European yields have increased substantially in recent weeks in conjunction with the selloff in U.S. Treasuries. Investor appetite is still strong with over 43 billion euros ($49 billion) of orders for what is an expected 7 billion euro issue — priced attractively at just over 2.1%. That’s 30 basis points in extra yield since mid-December.

For Italy, it still makes sense to raise large clips of money via long duration bonds now to get ahead of its annual funding schedule. That’s because the European Central Bank will terminate its 1.85 trillion-euro Pandemic QE bond-buying program, known as the PEPP, at the end of this quarter. Slovenia is also in the market with four- and 40-year tranches. The supply schedule is likely to be rapidly filled by other European nations and the European Union itself which is likely to issue around 100 billion euros this year to fund its NextGeneration recovery program.  

But there are other problems swirling nearer to home.

While the ECB will continue to buy a significant amount of debt for the foreseeable future, its intended direction of travel is clear: to wean the euro-denominated debt market off gargantuan monetary stimulus. This comes at a tricky time because political risk is rising. Italian Prime Minister Mario Draghi could step aside for the presidency later this month. This would present a challenging handover and possibly trigger a general election. The French presidential elections follow in April. (Bloomberg – Continue Reading)

A unique trade in options tied to the Secured Overnight Financing Rate turned heads in the U.S. rates options market on Tuesday, showing how far the contracts are from linking to Libor’s replacement.

The short call position was in the December three-month SOFR options, referenced by futures tied to Libor’s heir, which is the current benchmark for the popular eurodollar options. The trade size was just 5,000 contracts. But it still was more than double the outstanding positions held across all three-month SOFR options, a miserly 7,772 contracts as of Tuesday’s close. (Bloomberg – Continue Reading)