The vicious rise in bond yields in recent weeks leads to comparisons with bond market sell-offs of comparable magnitude, notably the 2013 taper tantrum, but analysts say this analogy falls short in one crucial way.
The ‘guts’ of the recent sell-off was different as higher bond yields were the result of panicked market participants demanding higher interest rates on longer-dated bonds to offset the risk of growth and inflation. By contrast, previous bond market tantrums were driven by interest rate expectations and Federal Reserve policies.
“We are a bit mental compared to the ending tantrum. But in many ways, what’s happening is significantly worse, ”said Ed Al-Hussainy, senior interest and currency analyst at Columbia Threadneedle Investments, in an interview.
“At the time of the winding down, the Fed was phasing out quantitative easing. We have not started the conversation at all, ”said Al-Hussainy. That suggests that if expectations of an aggressive turn were actually priced into bond markets, the pain at Treasurys could have even more leeway.
See: 3 reasons why the rise in bond yields is gaining momentum and rattling the stock market
Define tantrums as episodes when the 30-year Treasury yields TMUBMUSD30Y,
rose about 100 basis points from trough to peak, he noted that three met that definition – 2013, 2015, 2016.
During those tantrums, expectations around Fed policy changed rapidly, especially in 2013, when the mere indication of a tapering off in asset purchases by former Fed Chairman Ben Bernanke was enough to stir the bond markets.
But this time around, the Fed has consistently held on to its message that it was unlikely to consider winding down its asset purchases and raising interest rates.
During this week, senior Fed officials from Chairman Jerome Powell to Kansas City Fed President Esther George underscored their commitment to support the economy during the pandemic.
Nevertheless, the 10-year treasury bill TMUBMUSD10Y yields,
shot above 1.50% Thursday, rattling investors in the stock market. The S&P 500 SPX,
is down 1.8% this week, while the Nasdaq Composite COMP,
4.5% fell on the same piece.
ReadFed’s Powell says the economy could improve later this year, but sees no change in policy
Checking out: Fed’s Williams says he expects inflation to remain subdued despite the strong growth ahead
Perhaps more than the outlook for Fed policy, a major driver of the bond market sell-off is that investors are demanding more returns to offset the risks surrounding higher fiscal spending, growth and inflation going forward, Al-Hussainy said .
The main way to measure this compensation is through the term premium.
Bond market analysts say that a bond’s yield consists of the term premium and the future path of the short-term interest rate. The first measures how much additional compensation investors need in exchange for the risk of owning longer-dated bonds over their shorter counterparts.
That’s because extended-term treasuries are vulnerable to uncertainty about how economic growth and inflation could develop over time, an increasingly pressing problem as trillions of tax cuts and a mountain of consumer savings increase the risk that an economy running on all cylinders from the wreckage of the COVID-19 pandemic.
That term premium is now at a positive 28 basis points from Thursday, after a low of negative 88 basis points in August, according to data from the New York Fed branch.
In that regard, Al-Hussainy said it could reflect the success of the central bank’s new framework, which aims to push inflation above 2% for a sustained period of time before slashing the pedal.
“There really is no point in staying ahead of the Fed,” he said.
Also read: Has Powell lost control of the yields or is the latest gains part of the Fed’s playbook?