Posts tagged: tapering

Here’s What The Changing Stocks-Bonds Correlation Means For Equities When The Fed Tapers

The chart below shows how the correlation between U.S. Treasury yields and  the Dow Jones Industrial Average has varied under each iteration of the  quantitative easing program of bond purchases the Federal Reserve has employed  since the financial crisis. Under QE3 (the current iteration), changes in bond yields have have been  associated with larger changes in equity prices than under any other program.  So, when yields rise, so do equities, and when yields fall, so do equities — in  both directions moreso than in the past. The red square near the top of the chart plots the current levels of the  yield on the 10-year Treasury note and the DJIA. Its place above the regression  line shows that equities are looking rich based on this relationship.


Bond yields-equity prices regression

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CITI: Here’s The New Tapering Schedule

October FOMC statement is causing economists and market  participants to adjust their views on when the Fed is most likely to begin  tapering down its quantitative easing program. After the government shutdown and debt ceiling fight happened — and then was  merely postponed to the first quarter of 2014 instead of resolved — a new Wall  Street consensus formed around the notion that the Fed probably wouldn’t begin tapering until March.

However, the lack of any reference to the fiscal battles in the October FOMC statement spurred a small sell-off in stock and bond markets, and Wall Street  economists began to reconsider when tapering would happen in their reactions to the release. In a note, Citi’s Steven Englander presents a chart to illustrate these changing views. “A good data point or two and there is plenty of room for asset markets to back up,” he writes. “Figure 1 shows our view of the markets  expectations of tapering just prior to the September FOMC, just prior to October’s FOMC and today. The path is indicative, not a hard measure of  investor expectations, but we would stress how modest the pullback in  dovish expectations has been.”

Right now, the Fed buys $85 billion of Treasuries and mortgage bonds each  month. The chart below illustrates different forecasts for the path of how  monthly purchases will eventually be wound down to zero.


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