A new report by the Bank of Nova Scotia warns that the broader market may not yet understand the extent to which near term fed tapering could impact not only stocks but also asset values as interest rates climb up to compensate for reduced federal government buying.
Markets may not fully understand the Fed’s signals on further near-term tapering, and we
think the rate-hold promise will be challenged sooner than the Fed may wish.
The Federal Reserve may have now set itself up for a more aggressive market test across the curve into
2014. In the belly and the long-end of the Treasury curve this could come via the fact that while the Fed may
have embraced a tepid taper, it nonetheless signalled fairly strongly that there is further tapering to come in the
January meeting and that there is a high bar to halt further near-term tapering.
While the Fed also strengthened
forecast guidance for the fed funds target, it did so in a weak manner that could easily have markets testing the
front-end sooner than the Fed wishes in 2014. Simply put, we are deeply skeptical regarding forward