Yields Surge Day After Taper Announcement

Swap rates and Treasury yields surge 10-13 basis points in delayed reaction to Fed taper comments. Swap rates and Treasury yields registered their biggest move in months only a day after the FOMC’s accelerated taper timeline was met with a collective yawn by the market. Today’s move in rates pushed the 5-year Treasury yield to its highest level since early April while the 10-year yield broke out of its recent range (and above its 200-day moving average)- ultimately closing at 1.43%. This time, US equities did not sell-off in a “taper tantrum” – the S&P 500 had its best day in months climbing 2.2% on the day.

The Fed’s reverse repo facility (RRP) hit a new record on Wednesday increasing to $1.28 trillion. It was the fourth consecutive session that the facility’s usage hit a record. As financial institutions continue to be flushed and few short-term options available to park their cash, the usage of the Fed’s RRP has surged in 2021. To accommodate the influx of cash, the New York Fed doubled the counterparty limit for the second time this year to $160 billion per day.The facility is an important tool for the Fed to keep its target policy rate in range, as the RRP acts as a floor to other short-term interest rates. Since the RRP is a risk-free investment, institutions would be reluctant to lend their excess funds below the RRP rate, which is currently 0.5%.

New economic data points to slowing economic growth in the U.S. Earlier this month, the New York Fed and Philadelphia Fed showed resilient business activity within their districts. However, data released today by the Chicago Fed and IHS Markit showed contracting economic activity in their latest reports. The September IHS Markit composite index, which surveys purchasing managers in the service and manufacturing industries, grew at its slowest pace in a year. The Chicago Fed’s August national activity index, which tracks 85 monthly economic indicators, dropped to 0.29, down from 0.75 in July (a number over 0.0 indicates growth). Both reports pointed to labor and supply-chain issues as the primary contributing factors to the slowing growth.