U.S. ECONOMICS: CIBC Reaction To Fed News

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The Fed surprised again, having not tapered in September when the market was nearly fully prepared for it, and choosing to go ahead when only a minority were expecting it, CIBC says. The size of the taper, $10 billion off monthly purchases - hitting both Treasury and MBS buying equally - was "about what we would have expected in a first move," it adds.

As a counterweight to try to stave off a very bearish market reaction, CIBC notes the Fed now says it expects to keep the funds rate at zero until well past the unemployment rate hits 6.5%. They argue that their remaining buying should keep a lid on Treasury yields, despite a plan for further measured steps to wind down QE, it says. This was not as dovish as CIBC expected, and other than the "well past" statement, didn't really give much to the market to hang on to as reasons to be bullish on bonds, it adds. "But they may have felt that tapering was priced in anyway (whether now or in January really won't make much difference to their ultimate holdings), giving them confidence that they could keep 10 year rates from a massive further sell off for now. We see the Fed as timing future tapering steps based on both economic data AND the degree to which bond yields hold in, since they have done this move anticipating that the fixed income market won't suffer a major setback. As a result, we're retaining our view that 10-years will trade near 3% through most of 2014."




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