Wall Street banks step up preparations for Fed tapering volatility

With the Fed expected to formally announce on Wednesday that it will begin tapering its monthly bond purchases, sales and trading teams are hearing more from clients concerned about the ramifications for their portfolios and the longer-term implications of rising rates and higher inflation, several senior bankers said.

Nevertheless, in recent weeks banks have been running simulations to ensure their systems can handle spikes in volatility similar to 2013's ',' when a similar but unexpected decision by the Fed sent markets into a frenzy, and to prepare for different market scenarios, according to three trading sources.

The U.S. Treasuries market is already experiencing liquidity challenges which could spill into other markets, Bank of America warned in a report on Monday.The central bank has been buying up government-backed bonds since March 2020, adding $4 trillion to its balance sheet, as part of an emergency response to the COVID-19 pandemic.

"Tapering by the Fed certainly has the potential to remove some of the 'frothiness' from the market," said Paul Colone, U.S.-based managing partner at Alantra, a global mid-market investment bank.Most bankers, however, do not expect a repeat of 2013, when the Fed began withdrawing stimulus it had introduced as a result of the 2007-2009 global financial crisis.

"If tapering relieves some of the pressure of rising prices then that has the potential to benefit many businesses," said Colone.

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