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TD Securities strategists said they are going short 10Y real rates and adding to long 2Y TIPS BEs in the aftermath of Fed Chair Powell's willingness to discuss faster tapering at the Dec FOMC and "time to retire 'transitory'" comments yesterday.
  • TD anticipates the Fed "will indeed accelerate tapering to give themselves the flexibility to hike as soon as Mar 2022."
  • An earlier end to QE and potential faster hikes should move long end real rates higher. There is also a supply effect of tapering as markets will need to absorb more TIPS supply (net supply at $52bn in 2022 vs. -$20bn in 2021), and we go short 10y real rates to position for faster tapering.
  • We don't believe the market's low terminal rate pricing (which assumes a policy mistake) and expect real rate term premium to rise. The trade carries negatively at -7.2bp to Jan 1, 2022.