Market Extra: Confusion around Fed’s Clarida speech throws off investors

A scheduled speech by Federal Reserve Vice Chairman Richard Clarida ended up throwing off bond investors on Friday who saw headlines suggesting the central bank had made a sudden tweak to how it would expand the U.S. central bank’s $3.6 trillion balance sheet.

The text of Clarida’s speech provided to reporters originally stated the central bank would also purchase short-term debt and not just Treasury bills, or U.S. government debt of maturities with a year or less when issued. This was later corrected, saying that the central bank would only focus on bills.

Yet market participants who first saw the contents of the initial statement said they were temporarily confused the central bank had previously announced it would only look at Treasurys bills for its plans to expand the balance sheet.

New York Fed President John Williams had said on Thursday that the central bank would only buy T-bills, but that it could acquire short-term coupon-bearing securities later. He emphasized that technical details of the purchases were amenable to change.

Analysts have been wondering where the Fed will find enough sufficient T-bills to fill its monthly quota of $60 billion of purchases. Primary dealers only have a small share of the bills market on their balance sheets, and money market funds may be reluctant to part with their bills unless they were able to sell at a hefty premium.

See: Wall Street throws doubt on key detail of Fed’s plan to crank up balance sheet

“There was some confusion about the miss quote, but it was quickly clarified that the focus will remain on bills,” said Jonathan Hill, interest-rate strategist at BMO Capital Markets, in e-mailed comments.

He didn’t see it as the driver for the “puzzling” post-speech reaction in markets.

Stocks appeared to take a leg lower after the release of Clarida’s comments. The S&P 500 SPX, -0.24%   is down 0.5%. Treasury yields were on the slide, too. The 2-year note yield TMUBMUSD02Y, -1.27%   fell 3.7 basis points to 1.563%, while the 10-year note TMUBMUSD10Y, -0.64%  as down 1.7 basis points to 1.738%.

Read: Fed’s Clarida says economy facing risks while inflation remains muted

The Fed did not immediately respond to a request for comment.

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