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US Treasuries are trading a touch stronger in Asia on Thursday following the release of the minutes from the Federal Reserve’s March meeting.

The central bank is expected to begin the process of reducing the size of its $4.5tn balance sheet later this year if the US economy’s growth trajectory remains on course.

That ought to put downward pressure on bond prices, which have been bid up as the Fed hoovered up Treasuries and mortgage-backed securities in its efforts to keep borrowing costs down and support with the US economy’s recovery.

While the Fed’s minutes were expected to reveal some discussion about reducing the balance sheet, the bond market’s reaction has perhaps been the opposite of what might have been expected.

Yields, which move opposite to price, on benchmark US 10-year Treasuries were down 0.4 basis points at 2.3319 per cent in Asia today, and had fallen 2.5bps on Wednesday in the wake of the minutes. The yield on the more policy-sensitive 2-year note was down 0.8bps today at 1.226 per cent after falling 1.8bps yesterday.

On Monday, 10-year yields hit a one-month low as investors reassessed the outlook for the so-called global reflation trade. Some of the heightened expectations around US President Donald Trump’s pro-business agenda has been dialled back since his victory, and with it expectations his policies might be able to generate stronger and sustainable inflation.

That said, the Fed has raised interest rates twice since Mr Trump was elected, most recently in March, and remains optimistic on the whole about the prospects for the economy and the trajectory for interest rates.

Some analysts, such as Richard Clarida at PIMCO, think the Fed may not have done enough in these minutes to convey its intentions, particularly whether they should adopt a passive approach – stop reinvestment in Treasuries – or go cold turkey and stop buying Treasuries.

Mr Clarida said:

In short, a passive program will not be predictable, and a predictable program – at least for [mortgage-backed securities] – won’t be passive.

So the Fed today began to answer some but by no means all of the questions it needs to resolve before it begins to scale back the size of its portfolio. But if the committee intends to commence the process later this year, it still has a lot of work to do.

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