What the Bond Market Says About the Likelihood of the Fed Tapering

Phoenix Capital Research's picture


The big question on every investors’ lips today and tomorrow is: “will the Fed announce or hint at tapering QE?”


Over the last two years, one of the biggest tools in the Fed’s arsenal has been verbal intervention: the act of saying something in order to push the market up. Time and again 2011-2012 saw various Fed Presidents appear at key points to push the market higher by promising more action or stimulus.


With that in mind, we have to keep our eyes on the bond markets. The Fed is most closely linked to the Primary Dealers. These are the banks that help the Fed and the Treasury with Treasury Auctions (when the US issues debt). These banks, more than any other financial entities on the planet, have access to the Fed’s insights.


Here’s the list of Primary Dealers:


  1. Bank of America
  2. Barclays Capital Inc.
  3. BNP Paribas Securities Corp.
  4. Cantor Fitzgerald & Co.
  5. Citigroup Global Markets Inc.
  6. Credit Suisse Securities (USA) LLC
  7. Daiwa Securities America Inc.
  8. Deutsche Bank Securities Inc.
  9. Goldman, Sachs & Co.
  10. HSBC Securities (USA) Inc.
  11. J. P. Morgan Securities Inc.
  12. Jefferies & Company Inc.
  13. Mizuho Securities USA Inc.
  14. Morgan Stanley & Co. Incorporated
  15. Nomura Securities International Inc.
  16. RBC Capital Markets
  17. RBS Securities Inc.
  18. UBS Securities LLC.


With that in mind, I suggest keeping a close eye on the bond markets. These will be the “tell” of what the Fed is likely to announce.


The 30 Year bond is trending lower in a clear downward channel. We’re now coming up on support at which point we see a rally. This would likely indicate that the Fed will not suggest tapering or will at least word things very carefully.



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Best Regards

Graham Summers

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alphamentalist's picture

Graham, with due respect, this "analysis" is horseshit. Global curves have shifted dramatically higher off the lows over the last two months or so. We don't need to wait to see what the bond market has to say. It has been screaming at us for some time now. The bond markets are either saying they think the economy is rebounding (which is not what they are saying) or they are saying the risk of staying long bonds outweighs the benefits at this point. A big part of this is probably a view that a taper is coming. But there is probably a bit of fear that the offshore dumping will continue at a scale that will overwhelm any sensible levels of QE flow. Probably the biggest thing is that the Japanese were gracious enough to prove the outer bounds of benign QE. It is hard for the Fed to do more QE than they are currently doing after that. So any dealer/hedgie/"investor" whose investment strategy was anchored on front-running the Fed is having to re-think everything. IMHO.

Ying-Yang's picture

ZIRP is an important milestone in monetary policy because the central bank is no longer able to reduce nominal interest rates.

Monetary policy is at its maximum potential to drive growth under ZIRP, because the central bank has no more tools left to stimulate borrowing.

ZIRP is very closely related to the problem of a liquidity trap, where nominal interest rates cannot adjust downward at a time when the loanable funds market has not cleared.

thereisonlyonelaw's picture

Interest rates do not drive growth. Credit does not drive growth. All credit is, is a management technology. Example: a business person could build a home and rent it out; however, the person renting the home has less incentive to properly manage the place so instead, the business person builds the home then finances the new homeowner's purchase. The result being that the house is treated with more care and receives better maintenance than if he had owned it outright, thus generating a higher profit, meaning higher economic productivity.

ZIRP exists to resolve overleverage and persists until the overleverage shrinks. What is overleverage? People managing resources of a type and quantity that they do not have the competence to manage. For example, politicians in the United States who are managing the U.S. Government and it's underlying asset, the american nation; they are clearly overleveraged. Until there are budget surpluses, ZIRP will not end either in the U.S. or Japan, unless there is a dramatic rise in inflation that allows the nominal interest rate to climb without increasing the real interest rate. The purpose of ZIRP is not to loan out even more money (though that can happen) but to shrink the leverage through negative interest rates. ZIRP and QE are basically forcing resources into the hands of borrowers (government and others) at the expense of lenders (anyone with any kind of wealth). It's like a secret tax on wealth. The result, both in Europe, Japan and the United States is lower growth as resources shift into the hands of demonstrably bad wealth managers (those that can not pay market interest rates on the debt they incurred). America is already taxing the rich, it just uses the Fed instead of the IRS to do it.

RhoneGSM's picture

Repeat after me: There is no voluntary exit from ZIRP

thereisonlyonelaw's picture

Yes, there is. When the long term consequences of ZIRP become apparent and the political class realizes their power is actually diminishing by it, ZIRP will end. It looks like the political class basically doesn't believe the long term exists. Perhaps they don't care about demographic, cultural and economic collapse because they realize the world as we know it cannot survive. Or perhaps they are aware of the relatively low importance of ZIRP relative to other more serious threats to their power, like say, a soon to begin alien invasion or a technological shock. Maybe there is a secret aristocracy that manages the planet as their own private estate in an intelligent way, hiding behind apparently incompetent governments.

Lets Buy The Dip's picture

I repeated that 5 times, but in the back of my head, I was thinking like the elite. They want us to think the market will crash, and then get us short, and then burn our pockets, and fill their deep pockets even deeper, if you know what I mean. 

Quickly the market will see that there is a positive side to fed tapering, right now they do not. 


Midasking's picture

of course there isn't... we need bubbles to survive http://tinyurl.com/mem7o7x

NEOSERF's picture

I feel like a rally muppet