As feared/hoped/surmised, the Minutes from the most recent FOMC meeting didn’t include any meaningful surprises that hadn’t already been conveyed by Bernanke earlier this morning or in other Fed speeches over the past two weeks. While we’re not sure the Fed has really done anything to “map out” a tapering plan, per se (as suggested in the May 10th Hilsenrath article), they have more or less copped to tapering being on the table.
Mapping aside, the notion that the Fed was “closer to tapering” than markets may have previously anticipated is one of the key bearish themes for bond markets over the past two weeks. An absence of tapering verbiage in today’s minutes would almost certainly have reversed much of those losses, but that was effectively ruled out when Bernanke himself discussed tapering being possible some time in the upcoming 3 meetings. The only way a Fed member could have done any more to prepare markets for today would have been to say “The minutes on May 22nd will reference that some of us thing we should taper soon.”
Net/net, the Minutes were about as balanced as one would expect given the recent communications, but if we rewind to late April, the current tenor would seem downright precipitous. In that regard, the first 3 weeks in May have done an extraordinary job of getting expectations in the right place, but unfortunately that’s still a bad place for MBS and Treasuries. It’s a place where we understand that the Fed is going to keep buying long-term assets, but one in which there’s clearly a drive to reduce the overall amount of those purchases in order to mitigate system shocks in the future.
In other words, they don’t want QE to end like it began–with an abrupt change to the balance sheet of many hundreds of billions of dollars. Instead, it seems clear the Fed wants to ease us into things this time around. Metaphorically, “adding QE” is like an ER visit whereas “removing QE” is like weeks and months of physical therapy.
Bottom line, even though the “hype” isn’t this massively negative realization for bond markets, it is still very real, and precludes a triumphant directional bounce back for bond markets. On the bright side, we’ve gone no lower since the Minutes release, but neither have we really done much at all. Without fear of exaggeration, today was all about Bernanke this morning. The biggest movement in prices and volumes was seen then, and it was left to Minutes to either confirm or surprise. They didn’t surprise and here we are hovering just under 102-00 in Fannie 3.0s and just over 2.0 in 10yr yields.