February was a tale of two sides. Inflation concerns had long-end rates moving higher while supply and liquidity concerns had short-term rates moving lower. Over the course of the month yields on 10-year US Treasury were higher by 34 basis points (bps) and 3-month Treasurybills (T-bills) were lower by 2bps and SOFR lower by 4bps. Those amounts may not sound like a lot but for cash investors it represents 50% and 80% of the return.
Chairman Powell made attempts to sooth market concern during the large US Treasury sell off. He commented we are “a long way from full recovery” and that inflationary risks are contained. He confirmed that monetary policy will be accommodative for some time and did not give any hint that the US Treasury and mortgage-backed securities purchase program would be reduced. They stand at $80 billion and $40 billion per month, respectively.
Many unknowns remain relating to the path forward on rates. Most notably is the speed at which the Treasury reduces the balance of its cash and the size of the next stimulus bill. The downward pressure on yields was most acute the last week of the month and expectations still remain as liquidity continues to overwhelm investors looking to put money to work. We expect the Fed to raise Interest on Reserves and overnight reverse repurchase rate (RRP) as soon as March or perhaps as late as this summer.