The U.S. is experiencing a rare combination of easing monetary, fiscal, and regulatory policies at the same time. This trifecta of support, typically reserved for dire economic conditions, is creating a favorable environment where markets can run hot and valuations may overshoot their typical levels.
A U.S. administration decision for mortgage agencies to buy $200 billion in mortgages had an instant market impact, causing spreads to tighten quickly. In response, Morgan Stanley's mortgage strategy team moved from a positive to a neutral stance, demonstrating how fast regulatory news is absorbed by financial markets.
While often overlooked, easing regulatory policy is a powerful stimulus. The finalization of key capital rules is expected to free up approximately $5.8 trillion in balance sheet capacity for globally important banks, a significant but opaque driver of market liquidity that is separate from monetary or fiscal actions.