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The recent rise in US bond yields and inflation expectations has led some investors to suspect that the recurrence of the 2013 “taper rage” may be on the horizon.
The 10-year US Treasury benchmark rose above 1.3% for the first time since February 2020 earlier this week, while the 30-year bond also reached its highest level for a year. Yields are reversed to bond prices.
Yields tend to rise in line with inflation expectations, which have reached their highest levels in a decade in the United States, thanks to rising prospects for a large package of fiscal stimulus, the progress in vaccine deployment and accumulated consumer demand.
The “taper rage” in 2013 led to a sudden rise in Treasury yields due to market panic after the Federal Reserve announced that it would begin reducing its quantitative easing program.
Major central banks around the world have cut interest rates to historic lows and launched unprecedented amounts of asset purchases in an attempt to consolidate the economy throughout the pandemic. The Fed and others have maintained tones of support at recent policy meetings, promising to keep financial conditions loose as the global economy emerges from the Covid-19 pandemic.
However, the recent rise in yields suggests that some investors are beginning to anticipate a tightening of the policy sooner than expected to accommodate a potential rise in inflation.
By withdrawing support from the central bank, bonds tend to fall in price, leading to higher returns. This can also affect stock markets, as higher interest rates mean a higher debt service for companies, which causes traders to review the investment environment.
“The supportive stance of policymakers is likely to be maintained until vaccines have paved the way for a return to normalcy,” said Shane Balkham, Beaufort Investment’s chief investment officer, in a research note. this week.
“However, there will be a risk of another‘ rage ’similar to the one we witnessed in 2013, and that is our main focus for 2021,” Balkham projected, if policymakers began to undo this. stimulus.
Long-term bond yields in Japan and Europe continued to rise in U.S. treasuries over the weekend as bondholders shifted their portfolios.
“The fear is that these assets will be priced perfectly when the ECB and the Fed end up shrinking,” said Sebastien Galy, a senior macro strategist at Nordea Asset Management, in a research note titled “Little taper tantrum.”
“The downside odds are boosted in the United States by better retail sales after four months of disappointment and the expectation of a large $ 1.9 trillion fiscal package issue.”
Galy suggested the Fed would likely extend the duration of its asset purchases, moderating the upward momentum of inflation.
“Equity markets have reacted negatively to higher returns as it offers an alternative to dividend yields and a higher discount to long-term cash flows, which makes them focus more on growth in medium term, such as cycles, ”he said. Cycles are actions whose performance tends to align with economic cycles.
Galy expects this process to be more marked during the second half of the year, when economic growth recovers, increasing the potential for volume reduction.
It is reduced to the United States, but not to Europe
Allianz CEO Oliver Bäte told CNBC on Friday that there was a geographical divergence in the way the German insurer is thinking about the prospect of interest rate hikes.
“One is Europe, where we continue to have financial repression, where the ECB continues to buy to the maximum to minimize the spreads between the north and the south (the strong and weak balances) and at some point someone will have to pay the price for that, but in the short term I don’t see any increase in interest rates, ”Bäte said, adding that the situation is different in the state.
“Because of the massive programs that have passed, the stimulus that is happening, with the dollar being the world’s reserve currency, there is clearly a trend to cause inflation and it will come. Again, I don’t know when and how, but the rates interest rates have fallen and should increase further. “
The increase produces a “normal feature”
However, not all analysts are convinced that the increase in bond yields is material for the markets. In a note on Friday, Barclays head of European Equity Strategy Emmanuel Cau suggested that bond yields had lagged behind as they had lagged behind in improving the macroeconomic outlook during the second half of 2021 and said they were a “normal feature” of the economic recovery.
“With key drivers of inflation pointing upward, the prospect of an even greater fiscal stimulus in the United States and the accumulated demand driven by high excess savings, it seems right that bond yields will recover with other more advanced reflation, ”Cau said. , adding that central banks remain “firmly on hold” given the risk balance.
He argued that the sharp yield curve is “typical in the early stages of the cycle” and that, as long as vaccine launches are successful, growth will continue to rise and central banks will be cautious, asset class reflective movements appear. “justified” and actions should be able to withstand higher rates.
“Of course, after the strong movement in recent weeks, stocks could pause, as many sectors that have come together with yields appear to be over-bought, such as commodities and banks,” Cau said.
“But at this stage, we believe the rising returns are more a confirmation of the bullish equity market than a threat, so falls should continue to be bought.”