Traders work on the floor of the New York Stock Exchange.
NYSE
The recent rise in bond yields and inflation expectations in the US have some investors wary that a repeat of the 2013 “taper tantrum” could be on the horizon.
The benchmark’s US 10-year Treasury bond climbed above 1.3% for the first time since February 2020 earlier this week, while the 30-year bond also hit its highest level in a year. Yields move inversely with bond prices.
Yields tend to rise in a lockstep with inflation expectations, which have reached their highest level in a decade in the US, driven by the increased prospects for a major fiscal stimulus package, advances in vaccine introduction and pent-up consumer demand.
The “taper tantrum” in 2013 was a sudden spike in government bond yields due to market panic after the Federal Reserve announced that it would begin to wind down its quantitative easing program.
Major central banks around the world have cut interest rates to historic lows and bought up unprecedented amounts of assets to support the economy during the pandemic. The Fed and others have maintained a supportive tone at recent policy meetings, pledging to keep financial conditions flexible as the global economy appears to be waking up from the Covid-19 pandemic.
However, the recent hike in interest rates suggests that some investors are beginning to anticipate tightening policies to accommodate a possible rise in inflation earlier than expected.
When central bank support is removed, bonds usually fall in price, pushing up yields. This can also spill over into the stock markets, as higher interest rates mean more debt service to companies, forcing traders to reassess the investment environment.
“The supportive stance of policymakers is likely to remain in effect until the vaccines have cleared a path for some return to normalcy,” Shane Balkham, chief investment officer at Beaufort Investment, said in a research note this week.
“However, there will be a risk of another ‘taper tantrum,’ similar to the one we saw in 2013, and this is our main focus for 2021,” Balkham predicted, should policymakers begin to phase out this incentive.
Long-term bond yields in Japan and Europe followed higher US Treasuries towards the end of the week as bondholders shifted their portfolios.
“The fear is that these assets will be priced to perfection when the ECB and the Fed could eventually wind down,” said Sebastien Galy, senior macro strategist at Nordea Asset Management, in a research note entitled “Small taper tantrum”.
“The chances of winding down are helped in the United States by better retail sales after four months of disappointment and the expectation of major issues from the $ 1.9 trillion fiscal package.”
Galy suggested that the Fed would likely extend the term of its asset purchases, dampening the upward momentum in inflation.
“Equity markets have reacted negatively to higher yields as it offers an alternative to dividend yield and a higher discount on long-term cash flows, making them more focused on medium-term growth, such as cyclical stocks,” he said. Cyclical stocks are stocks whose performance generally matches economic cycles.
Galy expects this process to be more evident in the second half of the year, when economic growth picks up, increasing the potential for run-off.
Tapering in the US, but not in Europe
Allianz CEO Oliver Bäte told CNBC on Friday that there were geographic differences in the way the German insurer thinks about the prospect of rate hikes.
“One of them is Europe, where we continue to have financial repression, where the ECB continues to buy up to the maximum to minimize spreads between the north and the south – the strong and the weak balance sheets – and at some point someone will have to. pay the price for that, but in the short term I don’t see a spike in interest rates, “Bäte said, adding that the situation is different.
“Because of the massive programs that have taken place, the stimulus that is taking place, and the dollar being the world’s reserve currency, there is clearly a trend to fuel inflation and it will come. Again, I don’t know when and how, but interest rates have become steeper and should rise even further. “
Rise produces a ‘normal characteristic’
However, not all analysts are convinced that the rise in bond yields is material for the markets. In a note on Friday, Barclays Head of European Equity Strategy Emmanuel Cau suggested rising bond yields were overdue as they lagged behind the improving macroeconomic outlook for the second half of 2021, saying they were a “normal feature” of economic recovery.
“With the main drivers of inflation pointing upwards, the prospect of further fiscal stimulus in the US and pent-up demand driven by high savings surpluses, it seems good that bond yields are catching up with other more sophisticated reflation deals,” said Cau. , adding that central banks remain “firmly on hold” given the risk assessment.
He argued that the steeping yield curve is “ typical in the early stages of the cycle, ” and that as long as vaccine rollouts are successful, growth will continue to pick up and central banks remain cautious, reflationary moves between asset classes appear “ justified ” and equities should be able to withstand higher interest rates.
“Of course, after the strong movement in recent weeks, equities could usher in a pause as many sectors that have recovered with returns look overbought, such as commodities and banks,” Cau said.
“But at this stage, we think rising interest rates are more confirmation of the bull market for stocks than a threat, so we should continue to buy down.”