Over the last few days there has been some considerable talk from the Fed around tapering. The most likely outcome of this is a steepening of the Treasury yield curve.
Fed’s Evan, Kaplan & Bostic are all open to an end of 2021 taper. However, Clarida and Mester said it wasn’t likely this year and Barkin did not enter into that conversation. On Tuesday, Bullard said that they were ‘not close to tapering’ and Rosengren says a ‘little while away’ from bond buying debate. So, a pretty mixed bag on the end to tapering.
However. JP Morgan’s analysts are anticipating a December taper and one way it may look would be a similar pattern to that laid down in 2013 and 2014.
Let’s go back in time
Step 1: In the year preceding the tapering in December 2013 (exactly where we are now) the curve steepened dramatically. !) year yields rose almost 100bps with the 3 year yields rising less than 5bps.
Step 2: Between December 2013 and the first hike in December 2015 the curve flattened sharply and 3 year yields rose over 60bps and 10 year yields dropped around 60bps.
Today’s OIS pricing is for a first hike around December 2023 and a December 2021 taper. So, US 10 year yields may have some further to rise and this could help with the recent DXY retracements if we get more tapering expectations.