Rise in Treasury yields prompts speculation of a ‘tantrum’ for markets
The recent rise in bond yields and U.S. inflation expectations has some investors wary that a repeat of the 2013 “taper tantrum” could be on the horizon.
The benchmark U.S. 10-year Treasury note climbed above 1.3% for the first time since February 2020 earlier this week, while the 30-year bond also hit its highest level for a year. Yields move inversely to bond prices.
Yields tend to rise in lockstep with inflation expectations, which have reached their highest levels in a decade in the U.S., powered by increased prospects of a large fiscal stimulus package, progress on vaccine rollouts and 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 that it would begin tapering its quantitative easing program.
Major central banks around the world have cut interest rates to historic lows and launched unprecedented quantities of asset purchases in a bid to shore up the economy throughout the pandemic. The Fed and others have maintained supportive tones in recent policy meetings, vowing to keep financial conditions loose as the global economy looks to emerge from the Covid-19 pandemic.
However, the recent rise in yields suggests that some investors are starting to anticipate a tightening of policy sooner than anticipated to accommodate a potential rise in inflation.
“The fear is that these assets are priced to perfection when the ECB and Fed might eventually taper,” said Sebastien Galy, senior macro strategist at Nordea Asset Management, in a research note entitled “Little taper tantrum.”
Galy suggested the Fed would likely extend the duration on its asset purchases, moderating the upward momentum in inflation. And expects this process to be more marked in the second half of the year when economic growth picks up, increasing the potential for tapering.
Barclays Head of European Equity Strategy Emmanuel Cau suggested that rising bond yields were overdue, as they had been lagging the improving macroeconomic outlook for the second half of 2021, and said they were a “normal feature” of economic recovery.
“Of course, after the strong move of the last few weeks, equities could mark a pause as many sectors that have rallied with yields look overbought, like commodities and banks,” Cau said.
“But at this stage, we think rising yields are more a confirmation of the equity bull market than a threat, so dips should continue to be bought.”
Reference: CNBC
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