Our fair value model favors UST 10Y at 1.60%.
Eugene Leow27 Aug 2021
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    The upcoming Jackson Hole Symposium offers another chance for Powell to provide more clarity on the Fed’s taper timing and pace. Expectations are probably moderate at best, with many participants expecting the Delta variant to prevent Powell from being hawkish. To be sure, 10Y yields did rise to 1.35%, (up from the low of 1.12%), suggesting that there is some wariness in the lead up to the event. However, these levels still look too low, with our fair value model pegging closer to 1.6%.

     

    We see little reason for the Fed to maintain excessively loose monetary policy. There is too much excess liquidity (more than a trillion in the Fed’s reverse repo facility), inflation is already uncomfortably high (running at 5% higher or above for three months) and the US labour market looks strong (almost two million jobs created over the past two months). Quantitative easing should be viewed as a crisis era policy where financial conditions are tight. Taken together, if COVID-19 cases recede soon and payrolls stay firm next week, September could be live for a taper announcement. Non-seasonally adjusted initial jobless claims and continuing claims (released last night) pushed to a post pandemic low, suggesting that payrolls would have a decent print.

     

    The question of taper is not if, but when. We think an announcement could come by the end of the year. Once vaccination rates improve across parts of the world and the current COVID wave recedes, we think that longer-term US yields could rise, paring back the summer pessimism.

    Eugene Leow

    Rates Strategist - G3 & Asia
    [email protected]

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