2021 Midyear Outlook: Navigating through the recovery
Listen in as we discuss our outlook on the US recovery and the Federal Reserve’s new framework, including its impact on inflation, interest rates and growth.
Demand for short-term debt has driven 1-month U.S. Treasury yields to a recent low of 0.0228%, a level not seen since the onset of COVID-19. Rates are getting dangerously close to zero, or possibly going negative.
Meanwhile, the U.S. Treasury will need to draw down its $1.6 trillion cash balance over the coming months to comply with federal debt-ceiling rules, limiting the supply of additional T-bills. Since U.S. Treasury can’t issue debt at negative rates, the Fed may need to step in. One solution may be to raise the rate of interest the Fed pays to banks on reserve deposits. Raising the interest on excess reserves rate (IOER) should allow short rates to move higher, as banks divert excess liquidity from the Fed funds market to central bank deposits. The Fed could also sell short-dated debt on its balance sheet, to create more supply. However, this is less appealing, as it could be viewed as a tightening of financial conditions.
Source: Bloomberg, Ivy Investments. Dates shown are July 1, 2020 through February 1, 2021. This chart is being provided as a general source of information for education purposes only, and in not intended as a recommendation to purchase, sell or hold any specific security or to engage in any investment strategy.