The vicious rise in bond yields in recent weeks compares with bond market sales of a similar magnitude, especially the “taper tantrum” of 2013, but analysts say this analogy is crucial to a crucial extent.
The “courage” of the recent sale was different, as higher bond yields were the result of market participants panicking and demanding higher interest rates on longer-term bonds to offset the risk of growth and inflation. . In contrast, previous tantrums in the bond market were driven by interest rate and Federal Reserve policy expectations.
“We are somewhat mentally similar to taper cholera. But in many ways, what is happening is significantly worse, “said Ed Al-Hussainy, a senior interest rate and foreign exchange analyst at Columbia Threadneedle Investments, in an interview.
“At the time of the downturn, the Fed was preparing to reduce the amount of easing. We haven’t started the conversation at all yet, “Al-Hussainy said. This suggests that if expectations of a hakkish change were actually quoted in bond markets, the pain in Treasurys could have more room to roll.
See: 3 reasons why the rise in bond yields is growing stronger and shaking the stock market
Defining the crisis crisis as episodes when the 30-year treasury bill produces TMUBMUSD30Y,
increased by about 100 basis points from minimum to peak, he noted that three met this definition – 2013, 2015, 2016.
During those outbursts of anger, expectations about Fed policy changed rapidly, especially in 2013, when the mere suggestion to cut asset purchases by former Fed Chairman Ben Bernanke was enough to hurt bond markets.
But this time, the Fed is constantly sticking to its messaging, being unlikely to think about reducing its asset purchases and raising interest rates.
Earlier this week, senior Fed officials, from President Jerome Powell to Kansas City Fed President Esther George, stressed their commitment to supporting the economy through the pandemic.
However, the 10-year treasury bill produces TMUBMUSD10Y,
exceeded 1.50% on Thursday, shaking stock market investors. S&P 500 SPX,
fell 1.8% this week, while Nasdaq Composite COMP,
decreased by 4.5% over the same area.
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Perhaps more than the prospects for Fed policy, an important factor in selling the bond market is investors who demand more returns to offset the risks of rising fiscal spending, growth and inflation in the future, Al-Hussainy said.
The main way to measure this compensation is through the premium term.
Bond market analysts say a bond yield is made up of the first term and the future path of short-term interest rates. The first measures how much additional compensation investors need in exchange for the risk of holding older bonds than their shorter counterparts.
This is because long-term treasuries are vulnerable to uncertainty about how growth and inflation could develop over time, a growing problem as billions in tax exemptions and a lot of consumer savings raise the risk that an all-cylinder economy could emerge from the wreck of the COVID-19 pandemic.
The term is now at 28 positive basis points since Thursday, after falling a low of 88 negative basis points in August, according to data from the New York Fed branch.
In this regard, Al-Hussainy said it could reflect the success of the new central bank’s framework, which aims to raise inflation by more than 2% for a sustained period before relaxing the pedal.
“Indeed, the Fed has no desire to cope with rising bond yields,” he said.
Read also: Has Powell lost control over yields or is the latest increase part of the Fed handbook?