Debt Market Monitor (November 2021)November 17, 2021
Many central banks have announced or commenced plans to begin tapering their bond-buying activities, known as quantitative easing. The U.S. central bank – the most influential in the world – will reduce the pace of its monthly purchases from US$120 billion per month to $105 billion in November and $90 billion in December. If the amount purchased continues to decrease by $15 billion each month, the entire program could be unwound by mid-2022.
The bond market was already pricing in an ever-more-hawkish Federal Reserve (Fed) for the last several weeks, resulting in a steepening of front-end yields and flattening of back-end yields. As the inflation reading remains high, global bond markets started to increase two- and five-year interest rates, anticipating faster and more aggressive rate hikes. The U.S. Treasury bond market even started to consider the idea of rate hikes as early as June 2022, just as the Fed’s tapering program was expected to conclude.
Faster and more aggressive rate hikes are seen as negative for long-term economic growth, and thus the back end of the Treasury curve started to flatten significantly. Fed Chairman Jerome Powell announced the tapering plan the market expected, but when pressed on the issue of rate hikes, Powell pushed back on the idea that they are coming soon and provided an indication that rate hikes will come after the tapering plan, pushing the first rate-hike expectation back towards September or December 2022.
Initial market reactions are mostly noise and are often reversed, but the knee-jerk move in the yield curve was a dovish reaction, pushing back rate hikes and steepening the Treasury yield curve.