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Fed Notes Provide Full Clarity on Taper, Treasury Yields Drop

After all the months of prepping markets, “telegraphing” and promising almost unprecedented transparency on the subject, the taper announcement and structure has arrived. Interestingly, it was communicated by a release of Fed Minutes, not an official meeting date with a Powell appearance.

Summary of the Minutes and Commentary from Fed Officials: The “next meeting” (November 2-3) is an appropriate time to announce tapering. Bond purchases are now $120 billion per month ($80B treasuries, $40B mortgage backed securities). The purchases will be cut at a rate of $15 billion per month. This will result in an 8 month tapering period, completed by July 2022. It looks like the markets were ready, the 10 year actually dropped about 7 bps to 1.54%. Hopefully the market will be able to price future rate risk without a lot of volatility. What comes after tapering? The runway will be clear for a rate increase in 4Q 2022 (the futures market indicates this is likely). Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners