Which Asset Class Is The Most Sensitive To a Fed "Taper"?

Tyler Durden's picture

Markets are starting to price the removal of the unprecedented policy stimulus provided by the Fed. Investors have faced this situation several times in recent years, but as Barclays notes, these prior episodes lacked broad consensus and proved short-lived as further risks to the global recovery quickly re-appeared. The edginess of markets to ebbs and flows in the data and Fed communications in recent months suggests this time is different. Market movements are saying the Fed’s exit is now more ‘when’ than ‘if’. Fed actions have led to some of the most extraordinary market moves on record. Nominal US bond yields are at historically low levels, and real yields have been negative for a prolonged time. Risky assets, by contrast, have rallied sharply, supported by central bank policy even in the face of poor economic data. If the Fed is preparing for an exit, these market moves may need to go in reverse...

Via Barclays,

Which asset classes are more vulnerable to Fed tapering?


We begin to tackle this question by constructing two indicators that seek to capture the sensitivity of various asset prices to Fed easing and the extent to which asset prices have responded to such easing. The explicit assumption here is that asset classes that have been most sensitive to Fed policy and appear most dislocated from historical norms are likely the asset classes at greatest risk.


Our first indicator calculates the beta of various asset classes to the Fed balance sheet expansion. In particular, we calculate the elasticity of asset prices to changes in the Fed balance sheet...


Our second indicator shows the (normalised) deviations of current asset prices from historical averages (z-scores). The idea is to gauge how Fed easing has affected prices relative to historical norms...

Investors who are concerned about the reversal of Fed easing should consider short positions in assets with high elasticities to the Fed and expensive valuations versus history. [ZH - European staples to the S&P 500 and US High Yield and US Healthcare stocks] appear vulnerable. Short positions on the latter make sense to protect risk portfolios.


The re-pricing has already started in safe havens


An earlier-than-expected Fed tapering has already been priced in to some markets, even before the events of this past week unfolded. Safe havens assets that benefited greatly from elevated global tail risks and central bank easing, such as gold, the Swiss franc and even the AUD, have suffered...


Source: Barclays

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Arrowflinger's picture

Guess here is Forex Condoms

Pinto Currency's picture


A global $100 trillion bond market will decline in value with increasing interest rates - and that is supposed to decrease the price of gold.


DeadFred's picture

If I am understanding it correctly they are pairing CB easing with global tail risk as if they are the same. They imply the CBs will stop easing because tail risk is dropping. Someone has been drinking the koolaid. CBs stopping easing IS the global tail risk. I'm going to sit back with a grin and watch them try to unwind this thing. Popcorn?

Pinto Currency's picture


Real interest rates will have to be substantially positive to impact commmodity and gold prices over the long term.

And deficit financing works against any substantial rise in interest rates.




max2205's picture

Whats the inverse etf for xlv?

Arrowflinger's picture

Yes, that was flipant.

Seriously now, does that mean they will also taper all of those swaps with European banks?


eigenvalue's picture

If the Fed tapers, then gold will go below $1000 at least...

oddjob's picture

Free money is being used to sell it down at any cost, bring on the tapering.

FEDbuster's picture

I am going to go with Peter Schiff's analysis, "there will be no exit, in fact, they will have to increase the QE".  No one would survive the withdrawal from the free money addiction.  The QE will continue till the end, and then the shit abyss.

fonzannoon's picture

He and Faber were right. We are debating tapering, and maybe they will for a month. But we are on QE4 85 bil a month. By this time next year they will be doing moar.

francis_sawyer's picture

If... Then...


Gotta love the simplicity of it all...

disabledvet's picture

if all that is going on is i'm being front run in the marketplace (China, Japan, Europe, et al) then the Fed would be foolish not to put QE in the hammer land and drive those rates down to zero. this is "in spite of a recovery in equities, property markets and the economy." the Japanese tried an end to QE and they had all sorts of issues when they tried it. but that's because they never figured out a way to grow revenues. Government has been withering on the vine over their for decades now. not true in the USA. we have massive surpluses which also will help drive down rates...though obviously not borrowing costs as the borrowing amounts are staggering. sure..."free money to bankers" but they're creating an industrial recovery to rival the industrial revolution itself. we'll see of course but if Japan really is on the verge of something truly awful here then that's a lot of productive assets that are going off line for a long, long, long time.

kito's picture

Maybe not....perhaps there are enough deluded investors who have faith in the cycle.....and that the economy, based on chart reading, is improving.....and therefore continue to invest in stocks....after all Ben is looking for momentum investing....getting the sideline money back into the markets so that the Dow becomes self sustaining......

francis_sawyer's picture

I doubt there's any such thing as 'sideline money'...


I consider the 'stock market' as a bunch of bagholders [which is no different than the definition of people who still have their money tied up in a ponzi or pyramid scheme]... You're hoping it doesn't fall apart before you at least get your money back... As such ~ you'll profess to have faith in the system...

Mostly... Today... That's a bunch of large & institutional bagholders [pension funds especially]... If that dam ever bursts, all bets are off...

IPA's picture

I always thought fifty percent of the people win in the stock market, but With all the recent flash crashes, I do not think chances are that good. The market needs to go up so old people can retire and the young can replace them in the workplace.

Bearwagon's picture

Why not $1000 below mining-costs, eh? Come on, you need to think bigger! ;-)

Urban Roman's picture

You can dig it out of the ground for $5.

Of course, that would be selling your labor very cheaply. Most people would want more than that. 

LawsofPhysics's picture

...and the U.S. will experience a hard default as U.S. treasuries will go bidless.  All paper promises are going to zero.  Got physical?

eigenvalue's picture

No. But I have got a lot of guns and ammo. I can get anybody's physical for free if needed.

LawsofPhysics's picture

Many of us do as well, dipshit.  Many of us also have a large dependable tribe as well, hooah.  Bring it.

kito's picture

Laws- eigens comments clearly bring nothing useful to this site.....tune out the static.....

LawsofPhysics's picture

Show me your portfolio, including all revenue generating assets, licensed IP, and personnel that you manage and let us decide what's useful.

kito's picture

I don't need no stinkin portfolio....I got guns and ammo and I is gonna takes what I need..........for free.....

LawsofPhysics's picture

So, your answer is to reply with the same response you choose to criticize.  When did Kito become a troll?  At least eigenvalue will make good fertilizer, he is certainly full of shit.

kito's picture

What's with you laws.....you're a bit moody today...

Umh's picture

Or he's talking to his self?

Ignorance is bliss's picture

You will most likely get free physical lead. Is that the metal you wanted?

TeamDepends's picture

Wow, the true eigen reveals himself!  The guy who takes every opportunity to bash stackers admits that if he is wrong he is ready and willing to rob at gunpoint the very people he insults!  Good luck with your plan pal, you are going to need it.

DosZap's picture

No. But I have got a lot of guns and ammo. I can get anybody's physical for free if needed.

Surely your not serious?,you think PM holders haven't got their stakes covered BOTH ways also?.


FEDbuster's picture

At that point, food will be more important than pms.  Let's pray we don't get to that point (but prepare in case we do).

beaker's picture

I saw a preview of that show in '09 when the dealers at our bond desk would not give you a bid on AAA corporates. They wouldn't even answer their fucking phones. When this plane goes down, the passengers will not be able to get out of their seats.

s2man's picture

>> U.S. treasuries will go bidless.

Yep, LoP.  I wonder what the S&P500 will look like when they force every retirement account out of stocks and into 'safe' treasuries.  All at the same time.

On second thought: They'll probably let equitites tank, first, then tell us we have to 'invest' in UST for our own good.  Then, when stocks drop even more they'll say, 'See?  We told ya'.

Frozen IcQb's picture

The dollar will take the hit before treasury prices do.

LawsofPhysics's picture

Tell us, what are those treasuries priced in again?  death of the dollar, death of U.S. treasuries is the same fucking thing.  Very strange isn't it?  This game of "he who has the most worthless paper wins."  fucking stupid.

Frozen IcQb's picture

By monetizing to infinity a hard default can be postponed. Eventually, the Fed will own 100% of the treasury market.

Lack of confidence will thus hit the currency as the US goes into a hyperinflationary cost push scenario.

LawsofPhysics's picture

So they will essential own a mountain of paper that will purchase nothing.  Okay.

Frozen IcQb's picture

Yes, that is correct.

All G7 countries will then debase in an attempt to maintain parity.

LawsofPhysics's picture

So, as I have said many times before, long black markets and sharecropping.

Frozen IcQb's picture


My best guess is that we'll be drafted into a war to deflect the blame on some manufactured (false flag) foreign threat. FDR pulled it off beautifully in 1941 following 18 months of economic sanctions with Japan. By suckering Japan into attacking, FDR solved both his 30% unemployment problem and unpopularity simultaneously. Sheeples bought the story hook, line and sinker even today. 100,000 American lives was just collateral damage.


Arrowflinger's picture

Great. I can buy a new Camry for $9500 then.

It pays to be hedged both ways. Smiles balance frowns.

glenlloyd's picture

This article is irrelevant. First, historical pricing fails to take into account the crisis we entered that necessitated QE. Second, that crisis has not dissipated just because the QE pump went into action, everything that was wrong when Lehman failed is still pretty much the same as it was before, so I cannot believe that we'll see prices drift toward their pre-QE levels...that's not the way it works.

QE has not helped all assets equally either. So I think this is a horribly misguided article.

Finally, the Fed cannot exit, to do so would be an admission of failure and they will never to it. They would rather impoverish us all hiding the truth rather than fall on their own sword.


orez65's picture

If the Fed tapers there will be a sell panic in the bond market.

PAWNMAN's picture

Gold at $200 below cost for miners to dig out of the ground will simply mean the miners will stop digging. What do you think that would do to the supply?

nope-1004's picture

Just one problem:  The FED  can't exit.  Who will buy our debt?  The ponzi has limits, and we are at the limit of who will buy our toxic shit.


BandGap's picture

Wow, I feel better knowing people like this are saving us from economic ruin.


LawsofPhysics's picture

I wonder what their "fee" was that they charged in order to waste trillions of taxpayer monies.  Gee, maybe we should have let the banks fucking die after all and just let the taxpayers keep their money?!?!  (or just give it to the taxpayer directly and let them pay down debt or spend it how they saw fit).  The rewarding of irresponsible behavior continues...