Increasing treasury yields lead to speculation of a “tantrum” for markets

The recent rise in US bond yields and inflation expectations has led some investors to worry that a repeat of the 2013 “tantic tantrum” 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 reached its highest level for a year. Yields are reversed from bond prices.

Yields tend to rise in line with inflation expectations, which have reached their highest levels in a decade in the US, fueled by the growing prospects of a large package of fiscal incentives, progress in vaccine launches and reloaded consumer demand.

“Tantic tantrum” in 2013 was a sharp increase in Treasury yields due to market panic, after the Federal Reserve announced that it would begin reducing its quantitative easing program.

Large central banks around the world have cut interest rates to historic lows and launched unprecedented amounts of asset purchases in an effort to strengthen the economy throughout the pandemic. The Fed and others have maintained supportive tones at recent policy meetings, vowing to keep financial conditions free as the global economy appears to emerge from the Covid-19 pandemic.

However, the recent rise in yields suggests that some investors are beginning to anticipate a tightening of policy sooner than expected to adjust to a potential rise in inflation.

With the removal of central bank support, bonds usually fall in price, leading to higher returns. This can also spread to the stock markets, as higher interest rates mean greater debt service for companies, leading traders to re-evaluate the investment environment.

“The position of supporting policy makers will likely remain until vaccines pave the way for a return to normalcy,” said Shane Balkham, chief investment officer at Beaufort Investment, in a research note this week.

“However, there will be a risk of another ‘taper cholera’ similar to the one we witnessed in 2013 and this is our main goal for 2021,” Balkham said, as policy makers begin to relax. stimulus.

Long-term bond yields in Japan and Europe followed higher US treasuries at the end of the week, while bondholders shifted their portfolios.

“The fear is that these assets are at perfect prices when the ECB and the Fed could eventually shrink,” said Sebastien Galy, senior macro strategist at Nordea Asset Management, in a research note entitled “Little taper tantrum ”.

“Reduction rates are helped in the United States by better retail sales after four months of disappointment and expecting large emissions from the $ 1.9 trillion fiscal package.”

Galy suggested that the Fed is likely to extend the duration of its asset acquisitions, moderating the rising pace of inflation.

“Stock markets have reacted negatively to higher returns because they offer an alternative to dividend yields and a greater reduction in long-term cash flows, making them focus more on medium-term growth, such as cycles “, he said. Cycles 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 will increase, increasing the potential for content reduction.

Allianz CEO Oliver Bäte told CNBC on Friday that there was a geographical divergence in the way the German insurer was thinking about raising interest rates.

“One is Europe, where we continue to have financial repression, where the ECB continues to buy 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 any increase in interest rates, “Bäte said, adding that the situation is different at the state level.

“Because of the massive programs that have taken place, the stimulus that is happening, 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 been accentuated and should continue to be absorbed. “

However, not all analysts are convinced that the increase in bond yields is significant for the markets. In a note on Friday, Barclays head of European Equity Strategy Emmanuel Cau suggested that rising bond yields were delayed as they delayed the improved macroeconomic outlook for the second half of 2021 and said they were a ” normal feature ”of the economic recovery.

“Given the key factors of inflation, the prospect of an even greater fiscal stimulus in the US and the reloaded demand driven by the excess of high savings, it seems fair that bond yields recover with other more advanced refinancing transactions,” Cau said. that central banks remain “firmly on hold” given the balance of risks.

He argued that the yield growth curve is “typical in the early stages of the cycle” and that as long as vaccine launches are successful, growth continues to tick up and central banks remain cautious, reflective movements in asset classes appear “justified” and actions should be able to bear higher rates.

“Of course, after the strong movement in recent weeks, stocks could take a break, as many sectors that have gathered with yields seem over-bought, such as commodities and banks,” Cau said.

“But at this stage, we believe that rising returns are more of a confirmation of the capital stock market than a threat, so the declines should be bought further.”