Now that the once-dreaded taper is on the calendar, Wall Street experts say that investors should begin preparing for the end of the U.S. Federal Reserve's bond buying program.
Fed Chief Ben Bernanke first suggested that the central bank was considering cutting back the amount it buys in Treasuries and mortgage-backed securities last May, but the Fed didn't officially announce the tapering until last month. Instead of buying $85 billion U.S. a month in bonds, as it has been since September 2012, the Fed said that beginning in January it will from now on buy $75 billion U.S. in bonds each month.
At least one expert expects the Fed will cut purchases by $10 billion U.S. at each meeting this year until it gets down to $25 billion per month in the fall. At that point the Fed could decide to "tear off the bandage and say, 'enough is enough'" with Quantitative Easing.
But whatever the Fed does is likely to be highly telegraphed and predictable, he added. Few expect a major change in the Fed's communication strategy now with Janet Yellen leading the Fed. Yellen was approved by the Senate on Monday to become the next Fed chair.
Interest rates expected to rise: With the Fed expected to continue tapering, more than 90% of the strategists surveyed anticipate that bond yields will continue to tick higher in 2014. But none are expecting as big of a move as last year's.
The average estimate for the 10-year Treasury yield is that it will end 2014 around 3.4%. The 10-year yield finished 2013 just below 3%, rising more than a full percentage point from about 1.75% at the start of the year.
But this may not mean that the bond market is a bubble that's now popping. Most strategists said that they merely expect interest rates to normalize from their all-time lows because the U.S. and global economies are continuing to recover.
