February 26, 2025 | 高端服务 | As we cautiously approach the end of the month of February, the financials continue to retreat, but without great bearish conviction. As with the market for Treasury debt, yields want to move lower and therefore prices higher, but the pace of changes coming from the Trump Administration in Washington is keeping markets unsettled. Jim Lucier at Capital Alpha Partners sets the stage:
“President Trump's ‘flood the zone’ strategy is deliberate. It is part of a carefully calculated shock-and-awe effect, and not least of this shock-and-awe effect is what President Trump is trying to do to bring the federal bureaucracy under control – not just mass firings, layoffs, buyouts, or return-to-office policy, but a number of important personnel changes that he had hoped to implement in his first term, but which he wasn't able to.”
Meanwhile, no less an authority than FRB Dallas President Lori Logan informs us that she prefers to see the Federal Reserve Board buy Treasury bills as and when the Fed decides to resume net-purchases of Treasury debt for the system open market account (SOMA). This is the way it is supposed to be, unless the FOMC suddenly decides to buy residential mortgage-backed securities (MBS).
Logan’s views are hardly new and simply restate the Fed’s traditional policy of mirroring the issuance of different maturities of Treasury debt in SOMA. Yet clearly, Logan's regular yowling about the balance sheet suggests there are growing perturbations in the world of monetary mechanics. When the Fed bought all of those low-coupon mortgage securities in 2020-2022, the duration was in low single digits, but today those MBS have durations in excess of 15 years with commensurately lower prices.
Despite the reticence of Logan to provide any details as to when the modest shrinkage of the SOMA portfolio will end, there is already evidence that the Fed is about to pivot toward more aggressive ease. In this Premium Service edition of The Institutional Risk Analyst, we describe the next leg in FOMC policy and update readers on Q4 2024 financials for Block (XYZ) and Synchrony Financial (SYF). We’ll be publishing our IRA Bank Book Quarterly next week.
