in a statement Sunday night, said more than 80% of its suppliers of materials and decorative services have “resumed cooperation,” and that it has signed thousands of new contracts with various suppliers. At the end of August, the developer disclosed that construction had been suspended at some projects after it fell behind on payments. And by October, hundreds of Evergrande’s unfinished developments were affected by work stoppages.
With just a few days to go before the end of 2021, Evergrande said it intends to deliver 39,000 homes in 115 projects to buyers across China in December. It compared that to its completion of fewer than 10,000 units in each of the preceding three months.
In a post on social media Monday, Evergrande said apartment projects have been handed over in batches in 18 provinces and it released photos of completed buildings adorned with bright red decorations and people signing papers to take ownership of their homes.
Despite this, Evergrande still has many more commitments to fulfill and its debt crisis remains unresolved. The 25-year-old developer used to be one of the country’s largest by contracted sales and is on the hook to deliver units to more than one million people. Many buyers made large down payments on unfinished flats, expecting to take ownership of them in a few years.
Hui Ka Yan,
Evergrande’s founder and chairman, said that “under the care and guidance of governments at all levels,” as well as support from partners, financial institutions and other constituents, the developer has made progress in its commitments to homeowners.
He added that Evergrande would do whatever it takes to resume work and deliver homes and predicted that the firm will eventually be able to “resume sales, resume operations, and pay off debts.”
The company’s statement followed comments over the weekend from two Chinese regulators which said they would safeguard the rights of homeowners and keep the property sector stable. Beijing has been trying to prevent Evergrande’s debt crisis from hurting the many small businesses and ordinary citizens that the developer owes money and apartments to.
head of China’s Ministry of Housing and Urban-Rural Development, said in an interview with the state-run Xinhua News Agency that the regulator will address the risks of some leading developers that fail to deliver projects on time, with the goal of “guaranteeing home deliveries, protecting people’s livelihoods and maintaining social stability.”
The People’s Bank of China separately said—as part of a wide-ranging statement on the economy—that it would protect the rights and interests of homeowners and promote the healthy development of the country’s real-estate market.
Evergrande, the world’s most indebted developer, has been struggling under the weight of roughly $300 billion in liabilities, including around $20 billion in international bonds. The developer has missed payment deadlines on some of its dollar bonds, setting the stage for a massive and complex restructuring. Major credit raters have declared it to be in default.
Earlier this month, the conglomerate sought help from the government of its home province, Guangdong. It has since set up a risk-management committee that includes representatives from several state-backed entities.
Evergrande recently said the committee is working to help contain its risks and will engage with its creditors. Some international bondholders, however, have said there has been little communication from the company so far, the Journal reported last week.
The company’s Hong Kong-listed shares have plunged in value this year to historic lows and its dollar bonds are trading at deeply distressed levels. Markets in Hong Kong were closed Monday for a public holiday.
U.S. stock futures ticked up, suggesting Wall Street could stage a partial recovery after worries about the Delta variant of the coronavirus dragged major indexes lower.
S&P 500 futures gained 0.6% and Dow Jones Industrial Average futures strengthened 0.8%. Changes in equity futures don’t necessarily predict market moves after the opening bell.
European stocks climbed Tuesday after a four-session losing streak. The Stoxx Europe 600 added 1% in morning trade, led by gains in energy and utilities sectors.
BP jumped 2.1% snapping a losing streak of more than a week and SSE rose 2%.
The U.K.’s FTSE 100, which is dominated by large international businesses, climbed 1.1%. Other stock indexes in Europe also mostly climbed as France’s CAC 40 gained 1.2%, the U.K.’s FTSE 250 rose 0.7% and Germany’s DAX added 1%.
The euro and the British pound dropped 0.2% against the U.S. dollar whereas the Swiss franc was flat against the U.S. dollar, with 1 franc buying $1.09.
In commodities, international benchmark Brent crude was up 1.2% to $69.43 a barrel. Gold also gained 0.4% to $1,816.60 a troy ounce.
The German 10-year bund yield declined to minus 0.396% and the yield on 10-year U.K. government debt known as gilts was down to 0.553%. The yield on 10-year U.S. Treasury rose to 1.214% from 1.181%. Yields move in the opposite direction from prices.
Indexes in Asia mostly fell as Hong Kong’s Hang Seng lost 1.2%, Japan’s Nikkei 225 index was down 1%, and China’s benchmark Shanghai Composite shed 0.1% after falling by as much as 0.8% during the session.
Markets rallied in the first half of 2021, thanks to investors’ bets that economies would bounce back, as countries rolled out Covid-19 vaccinations and lifted restrictions on businesses. Reports on everything from retail sales and housing prices to employment have shown swaths of the U.S. economy healing, helping send the S&P 500 to 39 record closes this year and almost double from its March 2020 trough.
Monday’s pullback put a dent in that narrative. The Dow Jones Industrial Average fell 725.81 points, or 2.1%, to 33962.04, logging its steepest decline since October. Meanwhile, the yield on the 10-year U.S. Treasury note, which falls as bond prices rise, sank to its lowest level since February. And U.S. crude oil prices slid 7.5%—marking their worst session since September.
Behind the rout, investors say, is a growing list of concerns about the recovery. The Delta coronavirus variant has spread rapidly, reigniting the debate in several countries about whether governments should resume lockdowns and curb activity. Meanwhile, inflation has accelerated faster than many anticipated, and strained U.S.-China relations have put pressure on trillions of dollars’ worth of U.S.-listed Chinese companies.
Many money managers believe the global economy will be able to keep growing. They just don’t know how quickly—and whether the gains will be enough to keep increasingly pricey-looking markets rising after a banner first half.
“The market is saying the economy is going to slow down fairly significantly in the next weeks or months,” said Zhiwei Ren, a portfolio manager at Penn Mutual Asset Management.
Investors say much of what drove markets’ reversals on Monday is concern that the best of the economic recovery may be in the rearview mirror.
The 2020 recession in the U.S. lasted just two months—the shortest on record, according to the National Bureau of Economic Research. The economy powered higher in the year that followed.
Gross domestic product grew at a 6.4% seasonally adjusted annual rate in January through March, leaving the U.S. within 1% of its peak reached in late 2019.
Economists surveyed by the Journal estimate that the economy expanded at a 9.1% seasonally adjusted annual rate in the April-to-June period, the second-fastest pace since 1983. Corporate earnings are also poised to soar. Analysts are projecting profits for S&P 500 companies to rise almost 70% in the second quarter from a year earlier, a growth rate that would be the highest in more than a decade.
Now, some investors are asking: Is this as good as it gets?
Economists believe the pace of U.S. growth this year likely peaked in the spring and will moderate to 6.9% for 2021 as a whole before cooling to 3.2% next year and 2.3% in 2023. These dwindling expectations have stoked big moves among stocks and sectors within the S&P 500 as well as across the bond market.
“That’s what the market has been doing…starting to digest peak growth rates and realizing these growth rates are unsustainable,” said
chief investment officer of equities at Mellon Investments Corp.
Elsewhere around the world, growth also looks poised to slow—potentially pointing to further challenges for investors. The S&P 500 has continued to outperform the Stoxx Europe 600 and Shanghai Composite for the year. However, some investors wonder if the gap between U.S. and overseas indexes will narrow, if the recovery in the U.S. begins to stall more.
Oil Prices Tumble
One area of the markets where fear about growth quickly reared its head: the oil market.
For months, investors had piled into bullish bets on oil, assuming that demand would boom and the economy would stage a robust recovery. Many of those wagers have been unwound in recent sessions. Monday’s declines were driven by fears about the Delta variant halting travel and crimping demand for fuel.
Shares of energy producers, which tend to be sensitive to changes in the economic outlook, also pulled back. The S&P 500’s energy sector is now down 13% this month, the worst-performing group within the index.
For months, people around the U.S. opened their wallets and spent on everything from cars to travel. Investors grew more optimistic about the economy, as Americans got vaccinated, businesses reopened and many people found themselves flush with cash, helped in part by stimulus checks. One survey by Gallup showed that the percentage of Americans who considered themselves to be “thriving” in life reached 59.2% in June, the highest in more than 13 years.
Recently, signs have emerged that this optimism is starting to fade. Fresh data last week showed that consumers stepped up spending in June. However, new figures also showed that consumer sentiment in the U.S. declined in early July, missing expectations from economists polled by The Wall Street Journal. Meanwhile, the unemployment rate has stagnated, and some investors are now concerned about a labor shortage snarling the economy.
One of the biggest factors weighing on sentiment? Inflation. Consumer complaints about rising prices on homes, vehicles and household durables reached a record, particularly hitting lower and middle-income households. The Labor Department said its consumer-price index rose 5.4% in June from a year ago, the fastest 12-month pace since August 2008.
Because consumer spending drives much of U.S. economic growth, investors tend to heed signs that households are beginning to become more wary about major purchases. Inflation can also eat into corporate profits, making stocks look less attractive.
“Last week we had high inflation readings. Now we have concerns that the rise in Covid cases is dimming the economic outlook. High inflation and lower economic growth is not a good combination,” said
chief investment officer of CIBC Private Wealth Management, U.S., in emailed comments.
The Bond Market’s Warning
Even before Monday, bets that economic growth will cool rippled across the bond market. Investors have been gobbling up government bonds for weeks.
One effect of the slide in bond yields? The real yield on the 10-year Treasury note has been negative, and on Monday it slipped to 1.05%, the lowest since February. Real yields are what investors get on U.S. government bonds after adjusting for inflation. When those bond yields are negative, as they have been lately, investors are effectively locking in losses when parking their money in government bonds.
“People are worried about inflation but also a growth scare,” said
a portfolio manager at J O Hambro Capital Management. “You’ve never had a modern economy that’s reopened after a pandemic.”
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These fears have driven investors into government bonds and helped push those real yields lower and lower, he said.
While a souring outlook for growth is generally negative for stocks as a whole, one area of the market has actually benefited from negative real yields. Lower yields weigh on the discount rate in formulas used to estimate what stock prices should be, making future corporate earnings more valuable. The recent drop in yields has boosted shares of technology companies and other fast-growing firms and helped drive a mammoth shift in the stock market in recent weeks. Tech behemoths like
have risen to fresh highs, even as many other parts of the market have floundered.
And on Monday, the tech-heavy Nasdaq Composite outperformed its peers. Many investors returned to the bets that had flourished when people around the country were stuck at home during the Covid-19 pandemic.
Mutual funds and exchange-traded funds that buy TIPS, or Treasury inflation-protected securities, are boasting yields of 8% or more in a bond market where even 4% looks outlandish. Such funds took in an estimated $36.3 billion in new money in the first half of 2021, according to Morningstar—a record for any six-month period since TIPS funds were born in the late 1990s.
If an 8% yield tempts you to join them, listen up. These funds that purport to fight inflation are, ironically, inflating their own reported yields.
I’ve written about this problem before, but it’s never been worse. This week, every single inflation-protected security was trading at a negative yield to maturity before inflation. Yet more than two dozen mutual funds and ETFs that own these bonds are reporting yields of 6%, 7%, even 8% or more.
These Yields Are TIPSy
The reported yields on mutual funds and exchange-traded funds investing in inflation-protected government bonds vary wildly, depending on how they calculate their income.
TIPS pay interest, albeit not much these days—a 5-year note sold in April has a coupon of 0.125%. A big chunk of the return instead comes from the inflation adjustment to the principal.
On websites and in other marketing, funds display what’s commonly known as SEC yield. That number is sky-high right now.
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Under rules from the Securities and Exchange Commission, funds take “dividends and interest” earned per share during the prior 30 days, deduct expenses and annualize it. The resulting SEC yield tends to be roughly what you’d get if you multiplied the previous month’s net income by 10 or 12.
The SEC’s rules for calculating its yield, however, don’t say whether to include the inflation adjustment or leave it out.
And that gives fund companies a lot of leeway.
As the economy roared back, the Consumer Price Index came in at unusually high levels of 0.8% in May and 0.9% in June. Those are monthly numbers, so funds that annualize them and include the inflation adjustment to principal in their income have been reporting monster SEC yields. To believe in that yield is to imagine that such fluky numbers are sustainable.
Among the many examples this week were the $9.7 billion Fidelity Inflation-Protected Bond Index Fund (SEC yield: 7.11%), the $12.4 billion Pimco Real Return Institutional Fund (8.2%) and the $29.2 billion
“To help our clients make fully informed investment decisions,” says a Fidelity spokesman, “we [also] disclose the distribution yield for our bond funds, which is a better reflection of the shareholder experience.”
Distribution yield measures a fund’s income payouts, which also can include cost-of-living adjustments to principal.
Steve Rodosky, co-portfolio manager of Pimco’s inflation-protected bond funds, says the firm calculates and displays the yield “in accordance with the SEC rules.” Pimco’s disclosures also present distribution yield and estimated yield to maturity. As of July 14, for instance, at Pimco’s 1-5 Year U.S. TIPS Index ETF, the SEC yield was 8.79%; distribution yield, 6.89%; and the yield to maturity, 0.55%.
“From a market-expectation perspective, the estimated yield to maturity is a more stable indicator” than SEC yield, says Daniel He, another co-manager of Pimco’s TIPS funds.
In addition to SEC yield, says Karen Schenone, a fixed-income strategist for iShares, “investors should also look at yield to maturity and real yield” (or TIPS income adjusted for the inflation rate). Those measures are also displayed on iShares’ website and in other marketing materials.
Earlier this year, iShares added a pop-up disclaimer to its website: “An exceptionally high 30-day SEC yield may be attributable to a rise in the inflation rate, which might not be repeated.”
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At least $109 billion is invested in TIPS funds with SEC yields of 6% or more, according to Morningstar—roughly half the category’s total assets.
Not all have chosen to report inflated yields, though.
State Street Global Advisors is reporting negative SEC yields on several funds, including SPDR Bloomberg Barclays 1-10 Year TIPS ETF and SPDR Portfolio TIPS ETF. Vanguard Group also shows negative reported SEC yields on its TIPS funds.
“In my view, including the inflationary adjustment to the principal [in] the SEC yield is incredibly misleading,” says
head of ETF research at State Street Global Advisors. “It assumes that, on a go-forward basis, the inflation reading in the prior months will be persistent” even though the Consumer Price Index can vary wildly from month-to-month. “And many are unaware of this.”
Right now, “the market is experiencing very high month-over-month inflation, and a calculation that annualizes inflation accretion may reflect an overstated view of expected yield,” says a Vanguard spokesman. “Our practice has been to avoid that adjustment, which results in SEC yields on Vanguard funds with TIPS exposure appearing lower than other firms. Conversely, during periods where monthly inflation is negative, our SEC yield may look higher.” The firm feels this approach represents its TIPS funds’ real yield consistently and accurately, he says.
In short, you can’t earn 8% income in a 2% bond market. And funds that claim to be protecting against inflation should protect their investors against inflated expectations, too.
U.S. stock futures inched higher ahead of Monday’s opening bell, suggesting the S&P 500 could reach another record.
S&P 500 futures were up 0.1% and futures on the Dow Jones Industrial Average strengthened 0.1%. The contracts don’t necessarily predict moves after the markets open.
In Europe, the Stoxx Europe 600 traded mostly flat in morning trade as gains in healthcare and consumer staples sectors were balanced by losses in materials and energy sectors.
Ipsen slipped 2.2%.
The U.K.’s FTSE 100 was down 0.2%. Other stock indexes in Europe were mixed as Germany’s DAX and France’s CAC 40 were largely flat, whereas the U.K.’s FTSE 250 shed 0.2%.
The Swiss franc depreciated 0.1% against the U.S. dollar, with 1 franc buying $1.09 whereas the euro and the British pound gained 0.2% and 0.4% respectively against the dollar.
In commodities, Brent crude declined 0.1% to $75.32 a barrel. Gold rose 0.3% to $1,783.20 a troy ounce.
The yield on German 10-year bunds fell to minus 0.160% and 10-year gilts yields declined to 0.776%. The yield on 10-year U.S. Treasury was down to 1.522% from 1.535% on Friday. Yields move inversely to prices.
Stocks in Asia mostly slipped as Hong Kong’s Hang Seng lost 0.2%, Japan’s Nikkei 225 index traded broadly flat and fell 0.1%, and China’s benchmark Shanghai Composite was broadly flat.
The price of the new bonds have rallied since the first €20 billion worth, equivalent to $24 billion, were sold last week, pushing down their yield.
The new bonds could help narrow the gap in borrowing costs between countries such as Germany and Italy. The EU bonds will likely divert demand away from German bonds, until now Europe’s key benchmark risk-free asset, while also boosting the Italian economy, according to some investors and analysts. A large gap in borrowing costs is seen by investors as a sign of financial stress in the region.
While the U.S. has spent trillions of dollars on stimulus checks and unemployment benefits to carry the economy through the pandemic, Europe has been slower to get its act together, hamstrung in part by the conservative economic attitudes among many northern states and political dysfunction and weak economies in some southern states.
The European Union’s nearly €800 billion recovery plan should start to turn the tide. It is the first major pan-European debt issuance program collectively backed by all the member states. The stronger economies, such as Germany and the Netherlands, are in effect lending the strength of their balance sheets to help fund recovery efforts in the weaker south.
“It will be a key support for the economic recovery as the continent emerges from the pandemic,” said
The EU is expected to start distributing the money over the summer and the spending will be equivalent 0.7% of European gross domestic product this year, rising to 1.2% to 1.3% for each of the next three years, Mr. Turner said.
As well as helping to fund the recovery, the triple-A-rated EU bonds will also help to alleviate a shortage of safe assets, which is one of the reasons that German bonds trade at such deeply negative yields, according to Oliver Brennan, head of research at TS Lombard.
There are only about €2.2 trillion worth of German government bonds outstanding and more than two thirds of those are owned by the European Central Bank and other central banks or foreign reserve managers, leaving just a few hundred billion euros’ worth for all other institutions to buy, according to Mr. Brennan.
But from 2022 onward, the EU recovery fund will likely become the largest source of new bonds, selling roughly €150 billion each year, overtaking Germany, France and Italy.
“The recovery fund will ease the safe-asset shortage by offering an alternative home for foreign reserve managers,” Mr. Brennan said. The amount of German bonds available for other investors to buy will slowly increase and their yields will begin to rise, he added.
The moves are nascent so far, but since the EU issuance, German 10-year bond yields have risen to minus 0.215% from minus 0.270%, while the EU bond yields fell as low as 0.03% this week from 0.086%, according to Tradeweb. The EU bonds sold off slightly in line with the rest of the European government bond market on Friday.
More of the recovery fund will be spent on countries like Italy and Spain, where the pandemic has dealt a heavier blow than in countries like France and Germany. Italy is expected to receive more than 25% of the funds, while Germany will get less than 5%.
“Germany is one of the largest net contributors to the fund, while Italy is one of the largest net recipients,” Mr. Brennan said.
He recommends buying Italian bonds versus German bonds to bet on a narrowing of the spread—the difference in yields between the two.
That difference is currently about 1.05 percentage points for 10-year bonds, close to a recent low set in mid-February. The gap was as large as 3.2 percentage points in November 2018 and more than 5.3 percentage points during the worst phase of the eurozone debt crisis in 2012.
Before 2008, the gap was typically less than 0.3 percentage point, according to Tradeweb.
S&P 500 futures rose 0.1% and Dow Jones Industrial Average futures strengthened 0.2%. Nasdaq-100 futures were also up 0.1%. Changes in futures don’t necessarily predict movements after the opening bell.
European stocks advanced Wednesday for a three-day run of gains. The Stoxx Europe 600 climbed 0.2% in morning trade as gains in materials and energy sectors were offset by losses in consumer staples and utilities sectors.
The U.K.’s FTSE 100 gained 0.2%. Other stock indexes in Europe wavered as France’s CAC 40 meandered after the flat line, the U.K.’s FTSE 250 added 0.1% and Germany’s DAX was broadly flat.
The Swiss franc fell 0.1% against the U.S. dollar, with 1 franc buying $1.09. The euro was mostly flat against the dollar, with 1 euro buying $1.19. The British pound was up 0.3% against the U.S. dollar, with 1 pound buying $1.40.
In commodities, Brent crude rose 0.8% to $74.64 a barrel. Gold also strengthened 0.2% to $1,780.40 a troy ounce.
German 10-year bund yields strengthened to minus 0.159% and U.K. 10-year gilts yields were up to 0.790%. 10-year U.S. Treasury yields strengthened to 1.484% from 1.471%. Bond yields and prices move inversely.
In Asia, indexes were mixed as Hong Kong’s Hang Seng gained 1.5% and China’s benchmark Shanghai Composite gained 0.2%, whereas Japan’s Nikkei 225 index was largely flat.
Investors are rushing into longer-dated Treasurys in a bet that the Federal Reserve will act more quickly against inflation, leading to slower growth and lower interest rates in the longer term.
Yields on shorter-dated bonds rose and their prices fell Monday, reflecting higher rate expectations after the Fed’s policy meeting last week. Meanwhile, longer-dated yields dropped because higher interest rates in the near term would likely mean slower growth and lower interest rates further into the future. The shifts combined to produce what is known as the flattening of the yield curve.
“It’s flattening massively. The move has been quite brutal in the market,” said Laurent Crosnier, chief investment officer at
The Fed signaled last week that some policy makers expect two interest rate increases in 2023, and said officials had discussed an eventual tapering of bond-buying programs, although the timing remains uncertain. It also boosted inflation forecasts and said that if expectations of higher prices affect consumer and business behavior, they could act to address it. That marked a shift from a previous emphasis that inflation would be allowed to overshoot until the recovery is more certain.
The biggest moves since the Fed’s policy meeting have been in the difference between 2-year yields and 30-year yields. This has fallen by 0.25 percentage point, mostly driven by a 0.2 percentage point drop in 30-year yields to 2.023% on Monday, according to FactSet.
The gap between the 2-year and 10-year yields has also dropped significantly. Both these gaps are now back to their tightest levels since early February, before a selloff in Treasury markets that drove longer-term yields sharply higher.
A key change highlighted by Fed Chairman
came in his comments on labor markets and the high number of people who had retired during the Covid crisis, shrinking the size of the labor force. This means the economy is likely to hit full employment sooner than expected: High unemployment has been the Fed’s justification for allowing inflation to run hot in recent months.
“Employment is the key variable,” said
head of global credit strategies at fund manager Algebris.
Shortages in some labor markets and higher retirements could lead to wage inflation, which has a longer term effect on other prices than commodities, for example. But it remains hard to predict how many new jobs will be created and how many retirements will prove permanent, Mr. Gallo said. “Wage inflation is not a bad thing for society, but it might mean more volatility for financial markets.”
Bond markets in particular could see more volatility because the Fed’s tolerance for inflation is lower than people thought, according to Seamus Mac Gorain, head of global rates at J.P. Morgan Asset Management. “What this means is that the market will be very sensitive to inflation data and jobs growth from here,” he said.
The U.S. consumer-price index surged 4.2% in April and 5% in May. The latter was the biggest move in nearly 13 years.
Investors are having to rapidly unwind trades that were betting on the Fed letting inflation stay high without slowing bonds purchases or raising interest rates as the economy reopened. Money managers getting out of this so-called reflation trade is driving Monday’s moves, according to
an investment manager at Aberdeen Standard Investments.
“The market was sticking its fingers in its ears to all the signs that the Fed was shifting,” Mr. Athey said. “The positioning was heavily in reflation trades, a lot of positions are being cleaned out.”
Inflation expectations as measured by the Treasury market have declined in recent weeks. Five-year inflation expectations have eased from a peak of about 2.77% in mid May to less than 2.4%, while the 10-year forecast has dropped from 2.57% to less than 2.25%, according to
This added to heavy buying by U.S. banks starved of loan growth: They have bought a combined $139 billion so far in the second quarter, which means they are buying at a faster pace than during the first quarter, according to Deutsche Bank.
U.S. government bond yields edged lower Wednesday, with investors awaiting details from the Federal Reserve’s policy meeting.
The yield on the benchmark 10-year Treasury note recently traded at 1.490%, according to Tradeweb, down from 1.498% at Thursday’s close. The 30-year bond yield traded at 2.182%, down from 2.199%.
Yields, which rise when bond prices fall, slipped before the 2 p.m. release of details from the central bank’s meeting. Analysts and investors generally expect the Fed to hold short-term interest rates near zero and keep buying at least $120 billion a month of Treasury and mortgage bonds, policies implemented over a year ago to help ease trading conditions and fuel the U.S. economic recovery after last year’s market turmoil.
has reiterated his belief that the U.S. economy hasn’t recovered sufficiently for the central bank to tighten monetary policy. Investors are watching the meeting for new forecasts, which could show officials expect to raise interest rates sooner than anticipated in March. Some analysts believe that officials may begin discussing when and how to scale back the pace of bond purchases.