BONDDESK® | Rate Brief
Rate Brief 07-28-2014
- This week's release of the minutes from the June FOMC meeting suggested the Fed is considering ending its asset purchases in October, one meeting sooner than markets had been anticipating.
- If the economy progresses as the Fed anticipates, the Committee will likely announce a $15 bln taper at that meeting (has been $10 bln at each meeting), marking an end to its aggressive asset purchase plan.
- Ahead of the taper we suggested the such action was already priced in and that rates would fall, contrary to expectations they could only go higher.
- The excitement over the potential Fed taper, and the belief the U.S. economy is recovering, fueled speculation the yield curve would steepen as the economy reached escape velocity.
- However, there have been no indications the U.S. economy can produce anything more than the 2%ish growth it has become accustom to since the depths of the financial crisis.
- Virtually every spread has flattened since the taper was announced in December 2013.
- As the Fed's bond buying scheme winds down over the next couple of months a further slippage in yields is looking likely.
- The 30y looks as though it will bottom somewhere in the 3.05%/3.15% area.
- As we into year-end the Treasury complex will have to grapple with a Fed that has likely ended its asset purchases, increasing speculation a rate hike will occur at some point in 2015.
- The mid-term elections take place in November, and while a lot can happen before then, talk of the Republicans taking both the House and the Senate will increase chatter of a stronger U.S. economy in 2015.
- That backdrop sets up a return to the 4.00% area in the 30y at some point in the first half of 2015.