The US Federal Reserve announced that it would taper its $120 billion bond purchases rolled out as pandemic-era aid from November.
Following the announcement, the 10-year US Treasury yield inched higher on Wednesday, rising 3.7 basis points to 1.584 percent. On Thursday, the yield on the 10-year Treasury note fell 5 basis points to 1.53 percent. Meanwhile, the yield on the 30-year Treasury bond inched up 4.8 basis points to 2.006 percent on Wednesday, followed by a 1 basis point dip at 1.98 percent on Thursday.
As the treasury market churns over the announcement, investors brace for impact on other asset classes. A rapid rise in bond yields can affect other assets such as equities, commodities and housing prices.
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What did the Fed say?
After its two-day policy meeting, the Fed announced on Wednesday that it will start pulling back its $120 billion monthly bond-buying program to pare back the economic stimulus provided during the pandemic.
The central bank will "later this month" start reducing bond purchases by $15 billion per month — $10 billion in Treasuries and $5 billion in mortgage-backed securities. This means quantitative easing is likely to continue till the middle of 2022.
The Fed also announced that it would not raise interest rates.
"Our decision today to begin tapering our asset purchases does not imply any direct signal regarding our interest rate policy. We continue to articulate a different and more stringent test for the economic conditions that would need to be met before raising the federal funds rate," Fed Chairman Jerome Powell told the press.
Impact on bonds
According to Gurpreet Gill, macro strategist at Goldman Sachs Asset Management, yields on short-dated US bonds had only inched up on hawkish central bank talk and was less than those in other markets. This may also be because the Fed had indicated its first interest rate hike would depend on the status of the job market, Gill said.
"If inflation stays far above target in 2022, however, we think the Fed may begin to say that remaining weakness in labour supply is structural and hint at rate hikes," Gill told CNBC.
Investors dump equities and move back to bond markets when there is higher inflationary pressure.
Impact on other assets
The US dollar becomes more attractive to investors when treasury yields are high.
Meanwhile, a higher bond yield may have a negative impact on equities. At present, the volatility in US bonds is a sharp contrast to the placid rally of equities, Financial Times reported. US stock markets have shrugged concerns on inflation and tapering, rallying to record peaks last week. US equities rose almost 7 percent in October on strong corporate earnings, making it the best month of this year.
Higher Treasury yields affect individuals in the housing market also. Interest rates on fixed-rate mortgages toe Treasury yields and move higher when yields are high.
(Edited by : Jomy Jos Pullokaran)
