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Quicktake On Tapering

US TSYS
Tsy yield shave surged as US economic outlook improves amid drop in Covid-19 cases well ahead of Spring, improved vaccine inventory and distribution, prospect for $1.X trillion fiscal stimulus. Chatter over when the Fed will scale back buybacks (tapering) and/or normalize rates sooner than currently expected is on the rise.
  • TD: Security analysts "think the market is priced for tapering in H1 2022 and the first hike by mid-2023; an earlier Fed exit would have serious repercussions across asset classes." How will markets react?
  • TD said there is a "general agreement that r* is lower today and the Fed is aiming for an inflation overshoot." However, current Tsy market "is less liquid (especially in large tail events) and there is significantly more duration supply coming to market compared with 2013." Forward expectations:
  • The Fed will start to prepare markets for tapering only in early-2022, and announce taper in September 2022 ... with a 10-month tapering period and for the Fed to then keep rates and the balance sheet on hold for a little more than a year.
  • Expect the first hike in September 2024 and believe the market may be getting ahead of itself in pricing in taper and hiking risks.
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