If The Fed Steps Back, Do Yields Step Up?
We think three questions are top of mind among investors when it comes to the Federal Reserve’s securities purchase program (for more than a year, the Fed has been buying $80 billion of Treasuries and $40 billion of mortgage-backed securities each month with an eye toward keeping rates low and stimulating the economy, an undertaking that has helped leave it with more than $8 trillion in assets on its balance sheet) and those are:
- When will the tapering, or the unwinding of the
- When tapering commences, how much will the program
be reduced and how will that play out (e.g., will the Fed buy
less Treasuries or mortgage-backed securities, or both)?
- How will tapering impact the bond market and yields?
We feel comfortable taking a shot at the first two questions, believing that, barring a dramatic slowdown in the economy, the Fed will begin tapering this year and will incrementally reduce its purchases of Treasuries and mortgage-backed securities. When it comes to the third question, we are a bit less comfortable offering an answer; most folks seem to believe that once the Fed begins tapering, bond prices will move lower and yields higher – which makes sense as a massive buyer of Treasuries and mortgage-backed securities will begin stepping back from the market. But one might ask, if the start of tapering means monetary policy is tightening, could bonds catch a bid and yields move lower as investors price in slower economic growth and lower inflation as a result of the Fed taking away – albeit gradually – the proverbial punch bowl? We think a good argument can be made for either outcome, and we will be monitoring Fed policy and the bond market closely into year-end.
The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital Investments, LLC, a registered investment advisor. 2422-BCI-9/8/21
Tagged: Tim Holland, weekly wire, market perspectives, Federal Reserve, securities