Traders work on the floor of the New York Stock Exchange.
The recent rally in bond yields and inflation expectations in the United States has raised concerns among some investors that a repeat of the “taper tantrum” of 2013 is on the horizon.
The benchmark 10-year US Treasury bill 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 alongside inflation expectations, which have reached their highest level in a decade in the United States, fueled by heightened prospects for a sweeping fiscal stimulus, progress in vaccine deployments and the pent-up consumer demand.
The “taper tantrum” in 2013 was a sudden spike in Treasury yields due to market panic after the Federal Reserve announced it would start cutting its quantitative easing program.
Major central banks around the world have lowered interest rates to historically low levels and initiated unprecedented amounts of asset purchases in a bid to support the economy throughout the pandemic. The Fed and others have maintained a tone of support in recent policy meetings, pledging to keep financial conditions loose as the global economy appears to emerge from the Covid-19 pandemic.
However, the recent surge in yields suggests that some investors are starting to anticipate a tightening in policy earlier than expected to adjust to a possible rise in inflation.
With the removal of central bank support, bond prices typically decline, which increases yields. It can also trickle down to the stock markets, as higher interest rates mean more debt service for companies, prompting traders to reassess the investment environment.
“The supportive position of policymakers will likely remain in place until vaccines clear the way for a 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 ‘tap tantrum’ similar to the one we witnessed in 2013, and that is our main target for 2021,” Balkham projected, if policymakers start to loosen this stimulus. .
Long-term bond yields in Japan and Europe followed the rise in US Treasuries towards the end of the week as bond holders shifted their portfolios.
“The fear is that these assets will be priced perfectly when the ECB and the Fed could possibly decline,” said Sébastien Galy, senior macro-strategy strategist at Nordea Asset Management, in a research note titled “Little taper tantrum” .
“The odds of declining are aided in the United States by better retail sales after four months of disappointment and by the expectation of major issues of the $ 1.9 trillion tax package.”
Galy suggested that the Fed would likely extend the duration of its asset purchases, dampening the upward momentum for inflation.
“Stock markets have reacted negatively to a higher yield because it offers an alternative to dividend yield and a higher discount to long-term cash flow, forcing them to focus more on medium-term growth such as cyclicals, ”he said. Cyclicals are stocks whose performance tends to align with economic cycles.
Galy expects this process to be more pronounced in the second half of the year when economic growth resumes, increasing the downsizing potential.
Tapering in the United States, but not in Europe
“One is Europe, where we continue to suffer financial repression, where the ECB continues to buy to the maximum in order to minimize the spreads between north and south, strong balance sheets and weak balance sheets and at a time given, someone will have to pay the price for it, but in the short term I don’t see any increase in interest rates, ”Bte said, adding that the situation was different in the United States.
“Because of the massive programs that have taken place, stimulus measures that are happening, with the dollar being the world’s reserve currency, there is clearly a tendency to stoke inflation and it will come. Again, I don’t don’t know when and how, but interest rates have risen and are expected to rise further.
However, not all analysts are convinced that rising bond yields are important to the markets. In a Friday memo, Barclays head of European equity strategy Emmanuel Cau suggested that the rise in bond yields was lagging behind, as they lagged behind improving macroeconomic prospects for the second half of 2021, and said this was a “normal feature” of the economic recovery.
“With the main drivers of inflation pointing upwards, the prospect of even more fiscal stimulus in the United States and pent-up demand propelled by high excess savings, it seems only fair that bond yields are catching up. ‘other more advanced reflation transactions, “Cau said, adding that central banks remain” firmly on hold “given the balance of risks.
He argued that the slope of the yield curve is “typical in the early stages of the cycle” and that as long as vaccine deployments are successful, growth continues to rise and central banks remain cautious, reflationary moves. between asset classes seem “justified” and stocks should be able to withstand higher rates.
“Of course, after the strong movement of the past few weeks, stocks could take a break as many sectors that have rebounded with yields appear overbought, like commodities and banks,” Cau said.
“But at this point, we think the higher yields are more a confirmation of the bull market in equities than a threat, so the dips should continue to be bought.”
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