Monday, December 16, 2013

Is Fed Tapering Priced In?

With the Fed meeting this week, markets are anxiously waiting on any news about the Fed bond buying policy, QE3. Most financial market participants think that a taper event would be a non-event in the bond market, meaning that rates would not go up. We are not certain they are 100% correct. If you look at the 10yr Treasury chart, you can clearly see that we are but 12 basis points away from the highs, which occurred on 9/5/13 just a few days before the Fed decided NOT to taper. Therefore, one could say that the 10yr is ‘ready’ for a taper. However, if you look at the 3yr and 5yr charts this is not the case. The yield of the current 3yr is 28 basis points away from the high and the 5yr is 32 basis points away from the highs of 9/5/13. If you bought a 5yr today at 1.53% yield and it rose to a 1.85% yield in one month, as an example, the return on the bond would be -15.1%.  Yes, one can hold it to maturity, but given the current circumstances in the market and facing the Fed, it is a matter of ‘when’ not ‘if’ as to a tapering event. As a result, we continue to believe that a little patience with a very small opportunity loss may well be worth the wait.

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