Fed tapering: Bond market rout to catch up with equities as well, say Wall Street experts 

The US Federal Reserve's announcement of cutting down monthly asset purchasing by $15 billion led to a rout in the US Treasury yields, and halting a months-long rally.

While the stock market has mostly remained insulated from the rout, that may not be the case in the future, warned Wall Street experts.

Strategists from Bank of America Corporation (BofA) said that reduced liquidity in the market and changing policy environment will lead to shares being priced in for these factors and finally stopping the equity rally going across the US and European markets.

The S&P 500 and Nasdaq extended their positive run for nine days, their longest since December gains in retail and technology shares. With institutional investors remaining invested for technical reasons, and retail investors using their excess cash for the equity market, the equity market since 2020 has seen one of the most explosive periods of growth in history.

US bond yields inch up as Fed signals at taper; what it means for other asset classes

But with the change in liquidity, abundant markets are slowly coming to an end with new policy decisions, it’s going to be different in the future.

“This divergence is unlikely to sustain and the risk in equities are forced to price in the increasingly unfavorable policy environment,” a Bloomberg report quoted BofA’s strategists writing in a note on Tuesday.

“We think it’s only a matter of time before equities are forced to price in the increasingly unfavorable policy environment for a market addicted to central bank liquidity," the note added.

While companies have had solid earnings reports, the lack of excess liquidity, decelerating economic growth, and valuation appearing razor-thin, tapering of central bank asset purchases and potential interest rate hikes may cause equity rallies to rout.

BofA is not the only Wall Street major that has been warning against the potential rout either.

“The fundamental picture for stocks is deteriorating as the Fed starts to tighten monetary policy and earnings growth slows further into next year, turning outright negative for some companies,” Morgan Stanley’s analysts wrote in a note on Sunday.

“We think that this bullish trend can continue into Thanksgiving, but not much longer."