What the Bond Market Says About the Likelihood of the Fed Tapering

by Graham Summers

The big question on every investors’ lips today and tomorrow is: “will the Fed announce or hint at tapering QE?”

Over the last two years, one of the biggest tools in the Fed’s arsenal has been verbal intervention: the act of saying something in order to push the market up. Time and again 2011-2012 saw various Fed Presidents appear at key points to push the market higher by promising more action or stimulus.

With that in mind, we have to keep our eyes on the bond markets. The Fed is most closely linked to the Primary Dealers. These are the banks that help the Fed and the Treasury with Treasury Auctions (when the US issues debt). These banks, more than any other financial entities on the planet, have access to the Fed’s insights.

Here’s the list of Primary Dealers:

1. Bank of America
2. Barclays Capital Inc.
3. BNP Paribas Securities Corp.
4. Cantor Fitzgerald & Co.
5. Citigroup Global Markets Inc.
6. Credit Suisse Securities (USA) LLC
7. Daiwa Securities America Inc.
8. Deutsche Bank Securities Inc.
9. Goldman, Sachs & Co.
10. HSBC Securities (USA) Inc.
11. J. P. Morgan Securities Inc.
12. Jefferies & Company Inc.
13. Mizuho Securities USA Inc.
14. Morgan Stanley & Co. Incorporated
15. Nomura Securities International Inc.
16. RBC Capital Markets
17. RBS Securities Inc.
18. UBS Securities LLC.

With that in mind, I suggest keeping a close eye on the bond markets. These will be the “tell” of what the Fed is likely to announce.

The 30 Year bond is trending lower in a clear downward channel. We’re now coming up on support at which point we see a rally. This would likely indicate that the Fed will not suggest tapering or will at least word things very carefully.

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