Fed Minutes
From the Fed’s minutes:
Financial markets were quite volatile over the period since the September FOMC meeting. Investor senti- ment was strongly influenced by prospects for Europe, as market participants remained highly attuned to de- velopments regarding possible steps to contain the fis- cal and banking problems there. Economic data releas- es that were, on balance, somewhat better than market participants expected provided some support to finan- cial markets.
Longer-term Treasury yields declined appreciably fol- lowing the release of the September FOMC statement. Investors reportedly viewed the Committee’s assess- ment of the economic outlook as more downbeat than anticipated. In addition, the announcement that the Federal Reserve would lengthen the average maturity of its portfolio by purchasing longer-term Treasury securi- ties and selling an equivalent amount of shorter-term Treasury securities reportedly contributed to the de- cline in longer-term yields on the day. Yields on cur- rent-coupon agency MBS also moved lower on the an- nouncement that the Federal Reserve would begin to reinvest principal payments on agency securities in agency MBS. Over the following weeks, movements in yields were driven by shifts in investors’ assessments of the ongoing efforts to address the European fiscal and banking situation and by somewhat stronger-than- expected U.S. economic data. On balance since the September FOMC meeting, Treasury yields on shorter- dated securities and the expected path of the federal funds rate implied by money market futures quotes were not much changed. Yields on Treasury securities with maturities beyond 10 years moved down. Meas- ures of near-term inflation compensation derived from nominal and inflation-protected Treasury securities rose slightly over the intermeeting period, while similar measures of longer-term inflation compensation were about unchanged.
Credit default swap (CDS) spreads and equity prices of large U.S. banking organizations were again volatile over the period. Investor sentiment toward these fi- nancial institutions was strongly influenced by changes in investors’ assessments of the risks associated with the European fiscal and banking problems and the ex- posure of various financial institutions to Europe. Third-quarter U.S. bank earnings reports generally met investors’ expectations. On net, equity prices for U.S. banking firms were not much changed over the period since the last FOMC meeting, while their CDS spreads were a bit higher. European bank CDS spreads re- mained elevated, and these institutions continued to face somewhat strained conditions in short-term bank funding markets.
Although equity markets were volatile, broad U.S. equi- ty price indexes ended the intermeeting period little changed. Earnings reports for nonfinancial firms gen- erally came in somewhat better than investors expected and about in line with second-quarter levels. Gross public equity issuance by nonfinancial firms continued to be very weak in September and October, with a large number of firms shelving planned initial public offer- ings amid the volatility in equity markets.
Yields on investment- and speculative-grade corporate bonds edged lower, on net, over the period, leaving their spreads to Treasury securities slightly narrower. Credit flows for nonfinancial firms were mixed in Sep- tember and October. The pace of bond financing by investment-grade nonfinancial corporations slowed some in October from its robust September pace, while bond issuance by speculative-grade firms was limited. Nonfinancial commercial paper outstanding posted solid growth in October. In the leveraged loan market, issuance financed by institutional investors slowed sig- nificantly in the third quarter.
Financing conditions for commercial real estate (CRE) markets appeared to have deteriorated in some re- spects. Issuance of commercial mortgage-backed se- curities (CMBS) slowed further in the third quarter amid widening CMBS spreads, and only a small num- ber of deals were in the pipeline for the rest of the year. Prices of most types of commercial properties re- mained depressed, and aggregate vacancy and delin- quency rates for commercial properties were close to their recent highs.
Full minutes fed22nov.