Treasury Curve Steepens as Fed Says No Link Between Taper, Hikes

(Bloomberg) -- Treasury yields rose and the curve steepened after Federal Reserve Chairman Jerome Powell stressed that interest-rate hikes are not imminent as he announced plans to start reducing asset purchases.

Longer-end rates rose relative to those on shorter maturities, while measures of bond-market inflation expectations ticked up, suggesting some concern about how well the central bank will keep a rein on consumer-price expectations. 

Traders largely maintained bets on the timing of interest-rate increases from the level they were at prior to Wednesday’s decision. They were undeterred by Powell’s reiteration of a previous message that there’s no mechanical link between asset-purchase tapering and a higher fed funds target, but there was also little cause for them to amp up pricing of rate hikes. 

Money-market derivatives show about 55 basis points of rate increases by the end of 2022, little changed from what held at the start of the day. The first hike is seen coming around July, with about a 70% chance it comes the month before, overnight index swaps show.

“In short, we have a dovish taper underway, not a hawkish one,” said Michael Darda, market strategist at MKM Partners.

The gap between 2- and 10-year yields widened about 4 basis points to around 113 basis points. Two-year note yields, among those most closely linked to changes in Fed rate-policy outlook, were up about 2 basis points at around 0.47%.

“The focus of this meeting is on tapering asset purchases not on raising rates,” Chairman Powell said in comments to reporters Wednesday. “We don’t think it’s time yet to raise interest rates. We think we can be patient,” but “if a response is called for we will not hesitate.”

The Fed said it would reduce its monthly Treasury purchases by $10 billion and mortgage-backed securities by $5 billion. That’s a pace that if held steady would put the central bank on course to wrap up buying in eight months, although at present it has only committed to that pace for November and December. 

The bank’s Federal Open Market Committee did reserve the right to alter the pace of asset purchases in its statement Wednesday. However, many expected it most likely that the pace will persist until purchases are completed around mid-2022.

“In practice we believe it will take a significant shift in either economic or financial conditions to alter the pace of the taper,”  Michael Shaoul, chief executive officer at Marketfield Asset Management LLC, said in a note. 

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