The US Fed is seen more synchronised to unwind the huge “balance sheet” of US$4.5tril that was introduced during the 2008 global financial crisis where the bulk of debt is government debt. In a move to unwind the balance sheet, the US Fed will impose cap limits on how much it will allow to roll off each month without reinvesting. Any amount it receives in repayments that exceeds the cap limit will be reinvested. In short, the Fed will announce the level of those bonds it will allow to be rolled off. Caps will be set at low levels with a gradual increase every quarter. The unwinding of the balance sheet comes along with the Fed’s gradual path towards normalising interest rates. We still believe the Fed will institute another two more rate hikes during the year, bringing the total to three rate hikes. Our probability for a June rate hike still remains unchanged at 80% with the next hike in 2H2017. We are also pricing in another 2-3 rate hikes in 2018 and the normalisation of the interest rates would be around 2.50% by 2019. That would mean the potential unwinding of the Fed’s balance will be gradual to around US$2.5-3.0tril.

• The US Fed is seen more synchronised to unwind the huge “balance sheet” of US$4.5tril that was introduced during the 2008 global financial crisis. The bulk of debt is government debt. In a move to unwind the balance sheet, the US Fed will impose cap limits on how much it will allow to roll off each month without reinvesting. Any amount it receives in repayments that exceeds the cap limit will be reinvested. In short, the Fed will announce the level of those bonds it will allow to be rolled off.

• Caps will be set at low levels with a gradual increase every quarter. The process is similar to the tapering process where the Fed, on its monthly bond-buying programme known as quantitative easing, will announce a gradual reduction in the amount of bonds it would be buying each month.

• The unwinding of the balance sheet comes along with the Fed’s gradual path towards normalising interest rates. We still believe the Fed will institute another two more rate hikes during the year, bringing the total to three rate hikes. Our probability for a June rate hike still remains unchanged at 80% with the next hike in 2H2017.

• We are also pricing in another 2-3 rate hikes in 2018. We believe the normalisation of the interest rates would be around 2.50% by 2019. That would mean the potential unwinding of the Fed’s balance will be gradual to avoid negative surprises to both the financial markets as well as the real economy. We feel the cap level would reach a limit of around US$2.5-3.0tril.

Source: AmInvest Research - 25 May 2017