'To Taper Or Not To Taper,' That Is The Question

by: Dean Popplewell

Global sentiment remains dominated by the speculation over the timeline of the Fed’s move to reduce its bond-buying program. This week’s U.S. initial jobless claims fell to a multi-year low and other data showed the American consumer-price index rose for a third straight month in July. However, despite the improving jobs picture, the labor force participation rate in July was 63.4% - reportedly the lowest it has been since 1979. Regardless, Fed officials have been saying that they require signs of higher inflation, coupled with other encouraging indicators, before a decision to reduce any part of the current $85 billion monthly bond-buying program is made.

For the sixth straight week, the amount of US Treasurys owned by foreign accounts held at the Fed fell. The $5.2b drop brings the total decline in past 10-weeks to a little over +$58b. Is a falling bond market meaning that investors are losing confidence in the US? “Custodial holding at the Fed tend to track how Asian currencies are performing. When these strengthened amid growing Fed stimulus, dollars were bought to cap the strength, then used to invest in US Treasurys. Now that the Emerging Currencies are weakening the market is doing the exact opposite.

Anxiety over the Fed tapering next month continues to weigh on bond prices. US ten are ending the week straddling their highest yields (+2.81%). If the Fed does table “taper” in September, how much will it reduce its monthly $85b purchases by? At this stage it seems it will take a dismal August NFP print to derail a stimulus reduction.

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