The market impact of the Fed’s taper will be moderated by a significant decline in Treasury and Agency MBS issuance. An imminent taper is very likely now that a press trial balloon has been floated right before blackout and even the ECB is tapering. At the same time, Treasury is expected to lower coupon issuance and Agency MBS production is expected to continue to slow. In light of this, tapering can be thought of as maintaining the level of QE accommodation amidst significant declining issuance. While the mechanical impacts of taper will be blunted, the Fed’s taper announcement will still tighten financial conditions by bringing forward rate hike expectations. The Fed hopes to avoid another taper tantrum by separating taper from lift-off, but that is hard when one necessarily precedes the other. In this post we show how declining Treasury and MBS issuance will off-set Fed tapering and review the Fed’s communications challenge.

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