Expectations are for U.S. policy makers to hold rates steady at the Federal Reserve’s 2-day meeting on September 19-20.  Instead, the focus will be on whether officials announce that they will start reducing the central banks’ US$4.5 trillion balance sheet.  Treasuries continued last week’s decline in safe asset prices, with the yield on the 10-year gaining 1 bp to 2.21%, the highest in almost 4 weeks.

Meanwhile in Europe, the European Central Bank continues to brainstorm on scenarios for winding down its EUR 2.3 trillion (US$2.8 trillion) asset-purchase program.  To soften the impact of this program, that was seen to depress bond yields by 30-40 basis points across member states, the ECB is considering reinvesting maturing debt that will average EUR 15 billion a month in 2018.  Analysis is showing that, as a result, the ECB balance sheet is unlikely to shrink before 2025, and as such, there’s unlikely to be much upside for European bond yields until then.

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