Happy Sunday from Copenhagen and welcome to our flagship editorial. 

The cyclical rotation continues in markets, but interest rates have to a certain extent been out of sync with the business cycle for a while. The yield curve inverted during the summer of 2022, but we are yet to see a recession in the US economy, which is a bit out of the ordinary given the typical validity of the yield curve inversion signal.

Maybe the yield curve signal was flawed by the Fed’s SOMA QE purchases? After all, the Fed bought way too few T-bills and way too many notes and bonds compared to the actual duration profile of the issued debt in 2020 and 2021.

This is now an issue that is starting to make it to the Fed discussions as highlighted by the comments made by FOMC member Chris Waller on Friday. The lack of “duration-matching” between the QE/SOMA holdings and the actual debt duration profile is both an issue from a profit and loss perspective and from a yield curve perspective.

“Moving toward more Treasury bills would shift the maturity structure more toward our policy rate — the overnight federal funds rate — and allow our income and expenses to rise and fall together as the FOMC increases and cuts the target range,”
Chris Waller of the FOMC 

Chart 1: It hurts to mismatch maturity profiles