Tapering, Tightening and Rising Rates Uncertainty

Key points for note:

• Bond yields are rising again, and central banks have turned more hawkish.
• The Fed will soon commence QE tapering. The impact on bond yields is likely to be limited by the large absolute size of the Fed’s balance sheet and offsetting issuance flow dynamics.
• Policy rate expectations have more room to move. Current Fed forecasts and market projections still represent a glacial pace of policy tightening by longer run historical standards.
• Global rates markets have moved to price more aggressive policy rate hike assumptions and greater divergence is evident between markets – a theme that is likely to continue.
• High levels of inflation and growth uncertainty point to higher rates volatility.