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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