3 Oct

Yield Curve Steepening After Fed Doesn’t Taper

WRITTEN BY James Malthus, Macro Analyst

The Fed’s surprise decision not to taper QE purchases during their September 18th meeting led to a steepening yield curve over the last two weeks, as the 5, 7, and 10 year treasury yields have all declined by more than the 30 year. The decision not to taper was coupled with a more “dovish” tone as the FOMC emphasized the need to see more improvement in economic data before reducing QE.

Yield Curve Steepening After Fed Doesn’t Taper

The Fed has indicated that it will not raise rates until unemployment is below 6.5% and that economic data will continue to drive policy overall. It also mentioned that it is concerned about participation rates as well, indicating that in fact an unemployment rate below 6.5% may be needed to finally see a rate hike. Bernanke also stated during his press conference that asset purchases are not pre-determined and depend on economic conditions. The Fed also revised its economic projections downward, expecting 2013 GDP to be between 2.0-2.3% and 2014 GDP to be between 2.9-3.1%.

What does this mean for SPY? The Bernanke Put is alive and well! With the Fed focusing on the data and their expectations weakening, the main risk leading to a potential December taper would be for non-farm payroll data over the next two months to surprise massively to the upside. However, even if we see stronger data the internal politicking surrounding the probable nomination of Janet Yellen for the next Fed chair would make a December taper seem unlikely.

Going forward, short term rates (IEF), medium term rates (TLH), and long term rates (TLT) are likely to compress if jobs numbers miss consensus and equities (SPY) are likely to rally. Gold (GLD) will also likely rally as a decrease in nominal rates would push down real rates as well.

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