MacroScope

Rates sweetener makes Fed tapering pill easier to swallow

December 20, 2013

 U.S. and German government bonds came under selling pressure on Thursday, one day after the Federal Reserve announced it will start trimming its monthly asset purchases by $10 billion to $75 billion. The move was much anticipated but was also historically significant – it is the first step towards unwinding the abundant monetary stimulus that helped keep the financial system afloat during years of crises.  

But the bond sell-off was limited, only taking yields to the top-end of ranges held in recent months.  On Friday, U.S. yields were mixed and German borrowing costs little changed.

The reaction not only shows that tapering had already been largely priced in – even though it came earlier than some had expected – but it illustrates that the central bank successfully contained its fallout by tweaking the forward guidance.

The U.S. central bank said it was likely to keep interest rates near zero well past the time that the jobless rate falls below 6.5 percent, especially if inflation expectations remain below target.  This was a tweak from an earlier pledge to keep them steady at least until the jobless rate hits that level. The unemployment rate fell to a five-year low of 7.0 percent in November.

 According to Rainer Guntermann, strategist at Commerzbank:

 This package was quite neutral in terms of the overall accommodation from central bank policy.

 Lower-rated euro zone bonds, long supported by the European Central  Bank’s untested bond-buying program, also remained resilient faced with the prospect of less central bank liquidity.

David Keeble, global head of fixed income strategy, at Credit Agricole says:

 The periphery got away lightly from what went on.

The Fed started tapering – there was a little bit of concern that you could have seen some risk-off type of trade which never showed up.

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