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Macroscope | How US Federal Reserve’s tapering decision will reshape global bond markets
- What happens to Treasury yields will signal how the environment is changing and what will happen to global interest rates, credit markets and more
- If the Fed waits longer before it starts to taper its asset purchases, yields could quickly move lower
Reading Time:3 minutes
Why you can trust SCMP
Every three months, my colleagues and I meet to discuss the outlook for the global economy and, more importantly, bond markets. The US Treasury market and what will happen to the benchmark 10-year yield is always at the centre of discussions.
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Part of the process involves hearing the views of economists and strategists at leading investment banks. We did the most recent review in early September. The range of forecasts for the 10-year Treasury yield for the next three months was anywhere between 1 per cent and 2 per cent.
Apart from telling us that most forecasts are likely to be wrong, the exercise signals that there is great uncertainty out there. What happens to Treasury yields will not only signal how the environment is changing but what will happen to other global interest rates, credit markets, equities and currencies.
At times in recent weeks, it has looked as though a 1 per cent yield was more likely than 2 per cent. Yields peaked in March and fell sharply over the summer because of the spread of the Delta variant of Covid-19 and strong technical demand for government bonds. This was despite rising inflation in the US and elsewhere.
Since August, the market has consolidated, with 10-year yields in a 1.20 per cent to 1.40 per cent range. Many investors still believe yields should be higher given the strength of the recovery and higher inflation.
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The US Federal Reserve is expected to reduce its purchases of Treasury bonds from the current US$80 billion per month. Tapering will change the supply and demand dynamics.
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