Last night the Federal Open Market Committee (FOMC), the body responsible for settling interest rates in the United States, met and announced that there would be no change to monetary policy. Its guidance however, is that rates will increase again in September. Also, there was no change made to the rate of reduction in the size of its balance sheet. In the current quarter the rate of reduction per month is $40bn ($24bn from US Treasuries and $16bn from Agency/MBS). This rate is due to increase to $50bn per month in the fourth quarter of the year. Market participants had not been expecting any change but there may have been some expectation that the Fed would signal a reduction in the pace of increase, or at least provide a hint of how accommodative it believes its policy is and therefore how close it is to the peak in interest rates. Little was forthcoming however.

In addition, yesterday the US Treasury announced its plans for US government debt sales over the next quarter and again the sizes of debt auctions have been increased to fund the widening US fiscal deficit. Extra funding is still predominantly focused in the shorter part of the yield curve and via bill issuance. Bill issuance is again expected to increase in the next quarter and this is likely to continue to put pressure on money market rates. In turn this is likely to add to US Dollar strength and funding pressures in the weaker Emerging Markets that have to look for US Dollar funding. The implications of increased US rates coupled with an increase in US Treasury Bills and US Government Bond issuance provides a challenging backdrop to riskier asset classes.

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