Is Tapering Tightening?

Jim Cielinski, Global Head of Fixed Income at Janus Henderson, considers the impact of nuance on bond markets.

Investing in bonds these days sometimes feels like being a lawyer – language seems to take on ever more importance. This is most evident with the way the market pores over every change in adjective or turn of phrase spoken by central bankers.

It is at its most acute when deciphering the statements and speeches of officials of the US Federal Reserve (Fed), where the responsibilities are all the greater given the influence of US monetary policy and US government bond yields as a marker for rates more globally.

Troubling bond markets in recent months has been the shift in language from the Fed towards tapering, ie, reducing the pace of purchases of securities it undertakes through its quantitative easing (QE) programme. The current round of QE was always billed as a policy tool to deal with the disruption caused by COVID-19. Successful vaccination programmes mean that the emergency has abated and economies have reopened. As such, markets have been trying to second guess when QE will end.

There are two things worth drawing attention to here. First, the Fed has learnt from the “taper tantrum” of 2013 that it needs to communicate clearly its intentions after the market (back then) misinterpreted tapering as immediately presaging a rise in interest rates. Jerome Powell, the current Fed Chairman, has been consistent in saying there will be a lag between the end of tapering and any rise in interest rates. In mid-October 2021, futures markets implied that rates would rise in December 20221, suggesting a six-month lag from the end of tapering (assuming it commences late 2021 and ends mid-20222). This compares with a lag of 14 months in 2014-15. The truncation can be explained by the relatively high inflation levels currently.

US monetary policy history

Source: Refinitiv Datastream, US Federal Funds Target Rate (current range 0.00-0.25%), US Benchmark 10-year government bond (redemption yield %), Federal Reserve Total Assets on balance sheet (USD billions), 01 January 2010 to 8 October 2021. Past performance is not a guide to future performance.