The effect on market participants, a little bleary from slow markets and Christmas parties, was like a pre-lunch round of champagne. The S&P 500 skipped 1.7% to a new record high and the Euro Stoxx 50 followed with a 1.6% leap to its high point for the year.
Bond prices were largely unchanged by the Fed’s decision to cut its monthly asset purchase programme by $10bn to $75bn. Bankers said this was because much of the expectation of the event had been priced in earlier in the year when market participants first adjusted to the idea of life without QE.
“Whether it’s mid-swaps, Gilts or Treasuries, the market had priced in tapering at some point,” said a corporate bond syndicate manager in London. “There has been so little reaction to tapering being accelerated that it suggests it was completely priced in.”
Messages about the possibility of tapering in May and September seemed to absorb most of the violence of the markets’ reaction to tapering, and although the Fed’s decision came a month earlier than many had expected, the timing just before the Christmas break should mean any impact will be muted by the period’s typically low trading volumes.
Bankers were also reassured by the conservatism of the Fed’s decision, which will see interest rates remain low and tapering shaved by only $10bn a as long as there is continued improvement in the US’s economic fundamentals.
The measured nature of the announcement and the long run up to it since the idea was first mooted by Fed chairman, Ben Bernanke in May has left bankers upbeat about new issue markets’ prospects for the new year.
January rush expected
The removal of uncertainty over when tapering will begin “appears to leave conditions set fair for a busy start to the year in terms of SSA issuance,” said one head of SSA syndicate.
Meanwhile, a head of SSA debt capital markets said it could prompt borrowers to front-load issuance programmes.
Covered bond bankers also saw the Fed’s move as providing some much needed clarity that will support issuance in the first few months of next year.
Issuers and investors now know they can expect a gradual increase in yields over the coming months without any sudden moves that will cause major volatility, said one covered bond syndicate banker.
Issuers will not make major changes to issuance plans in January because of the announcement, said another.
The market was still wide open for core and peripheral banks, and with redemptions coming thick and fast in 2014 investors will have plenty of cash to put to work.
“This is a positive step that puts the market in a stronger position that it was before the announcement,” the banker said.
One side effect of tapering could be a steepening of covered bond curves, which could encourage issuers to target maturities in the middle of the curve.
‘Positive for FIG’
Other sectors of the FIG universe are also expected to continue the strong run they have enjoyed since September. “It’s very positive for FIG,” said one head of EMEA syndicate. “We were cautious that something might happen towards the end of the year to correct us but this crystallises credit levels, and we are bullish for the start of 2014.”
Equity capital markets bankers agreed that the Fed’s announcement came as an early Christmas present for those bankers lining up a busy transaction calendar for 2014.
“The market’s reaction suggests that people are still looking to move into riskier assets,” said one ECM banker in London. “That’s certainly constructive for the new issue market, and we expect a strong 2014.”
Loans bankers also considered the news a positive boost for their market next year with one leveraged loans banker telling EuroWeek: “Overall we are still bullish for next year.”
However one leveraged loans banker sounded a note of caution by saying that a rise in bond yields may have an impact on bridge financing.
“The high grade relationship deals that are ultimately never drawn are not directly linked to liquidity,” he said. “They are linked to ancillary business and capital. Tapering doesn’t affect those. It’s the drawn debt lower down the credit spectrum that could be impacted.”
Emerging bullishness
Meanwhile in emerging markets, senior bankers reflected the appreciation seen elsewhere for the Fed’s approach to tapering.
“EM investors spat the dummy on May 22,” said one emerging markets syndicate banker in London, "but this time round the market’s accepted that tapering is going to happen and they have confidence that it’s going to be gradually and slowly introduced. The reaction has been a non-event, which in itself is great news."
“We’re very bullish for next year as a whole now,” said one emerging markets origination official in London. “A dovish taper gives us no reason to be pessimistic. We’re now expecting a repeat of 2013s volumes in 2014.”
But a second syndicate official in London was more cautious. He pointed out that the Fed will have been carefully monitoring the market’s reaction to its move and that it can still speed up or slow down asset purchases.
“The reaction today has possibly bolstered the Fed’s confidence in tapering,” he said. “We just have to hope now that they stick to the plan they’ve set out.”
