Fixed income weekly dose of realism, August 19–23 (Part 2 of 5)
Fed on course for mid-September tapering
Last week, interest rates moved further up as the release of the last Federal Open Market Committee’s (FOMC) minutes added further noise to the tapering speculation. The FOMC meeting minutes pointed towards definite reduction in the quantitative easing program, starting with the September meeting. Two months ago, a survey of investors by ISI estimated that 40% of investors were expecting tapering to start in September with a mean reduction of 20% in bond purchases.
The FOMC minutes were released last Wednesday. They hinted that stronger-than-expected macroeconomic indicators seem to move several policy-makers to keep maintaining course and starting to taper the bond purchasing program as early as September. However, the figure for new home sales released last Friday was a big disappointment.
Interest rates react to minutes release
Interest rates reacted accordingly, sending the ten-year Treasury rate (IEF) to a two-year high of 2.89% last Wednesday. Most of the absolute movement in the yield curve was concentrated in the five-to-ten-year maturities.
Rates between two- and five-year maturity, though, increased the most in percentage terms, and rates below one year actually contracted. While the asset buying program focuses on creating demand on the long end of the yield curve, the shorter-term maturities are affected as investors reprice the full maturity curve.
Currently, the rates curve is getting very steep past the one-year rate due to the uncertainty of tapering, which means there’s a chance that rates will remain low—at least within the one-year horizon.
Browse this series on Market Realist: