US Rates: Progress to taper, but not substantial enough

Another baby step to taper.
Eugene Leow29 Jul 2021
    Photo credit: Unsplash Photo

    Overnight, the US Federal Reserve’s Open Market Committee took another small step towards taper. The FOMC statement noted that the economy has “made progress towards these goals (maximum employment and price stability)” and Fed Chair Powell indicated that officials had taken a “deep dive” on how to go about scaling back bond buying but no concrete decision has been made. It is interesting to note that Powell does not seem to place as much weight on the impact of the current US COVID-19 wave on US economic growth. Meanwhile, inflation is still viewed to be largely transitory. Operationally, two standing repo facilities (domestic and foreign) have been established to backstop money markets during times of acute liquidity stress. 

    The overall reaction in the US Treasuries space was muted. While there was progress towards taper, the timeline has not been brought forward. The Fed probably needs another 1-2 strong payroll reports before achieving substantial progress on the labour market. We still see actual taper to begin in end-2021 / early 2022. 10Y yields initially rose to 1.27% before closing about unchanged. That said, the market is not as confident that inflation will stay anchored. 10Y breakeven crept up 4bps to close above 2.40% for the first time since early June. Right now, the market has undone the hawkish Fed pivot at June’s FOMC meeting, taking breakevens higher and real rates lower

    We think that challenges on global growth due to the Delta variant could keep term premium suppressed, anchoring US yields in the short term. These fears could dissipate as vaccinations pick up in the coming months, allowing 10Y yields to head back above 1.50%. A slowdown in the Chinese economy, exacerbated by the ongoing regulatory crackdown is another fresh risk to watch, keeping investors somewhat cautious. Lastly, on a positive note, there has been some progress on the bipartisan USD 550bn infrastructure plan, with a Senate vote possible as soon as the weekend.

    Eugene Leow

    Rates Strategist - G3 & Asia

    Subscribe here to receive our economics & macro strategy materials.
    To unsubscribe, please click here.

    The information herein is published by DBS Bank Ltd. It is based on information obtained from sources believed to be reliable, but the Group does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation & the particular needs of any specific addressee. The information herein is published for the information of addressees only & is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Group, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Group or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Group & its associates, their directors, officers and/or employees may have positions or other interests in, & may effect transactions in securities mentioned herein & may also perform or seek to perform broking, investment banking & other banking or finan­cial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts & tables are CEIC & Bloomberg unless otherwise specified.

    DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E. DBS Bank Ltd., Hong Kong SAR Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.

    The information set out in this website ("Information") is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation. This Information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation. This Information is published for general circulation only and does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person. Visitors accessing this website should always seek advice from an independent financial adviser regarding the suitability of the Information referred to herein (taking into account the specific investment objectives, financial situation and/or particular needs of each person in receipt of the Information) before making any investment and/or any purchase in reliance of the Information. Please refer to the actual research publications for important disclaimers and disclosures, where applicable.