The sharp increase in bond yields over the past few weeks compares sales of the bond market of similar magnitude, especially the ‘taper tantrum’ of 2013, but analysts believe that this analogy falls short in one important measure.
The ‘guts’ of the recent sell-off were different because higher bond yields were the result of panicked market participants demanding higher interest rates in longer-term bonds to offset the risk of growth and inflation. In contrast, previous anger in the bond market has been driven by expectations around interest rates and the Federal Reserve’s policy.
“We are a kind of spiritual measure for the taper increase. But in many ways, it’s worse, ”said Ed Al-Hussainy, a senior analyst at Columbia Threadneedle Investments, in an interview.
‘At the time of the taper increase, the Fed was reducing quantitative easing. We have not started the conversation at all, “said Al-Hussainy. This suggests that if the expectations of a false turnaround in bond markets were to be praised, the pain in Treasurys could have further room to run.
See: 3 reasons that the rise in bond yields is gaining steam and rattling the stock market
Tantrums define as deliveries when the 30-year treasury letter TMUBMUSD30Y yields,
about 100 basis points rose from trough to peak, he noted that three met the definition – 2013, 2015, 2016.
During the outbursts of rage, expectations around Fed policy changed rapidly, especially in 2013 when the mere indication of the reduction in asset purchases by former Fed Chairman Ben Bernanke was enough to cultivate bond markets.
But this time around, the Fed is consistently holding on to its messages that it is unlikely to consider reducing its asset purchases and raising interest rates.
During this week, senior Fed officials from President Jerome Powell to Kansas City President Esther George underscored their commitment to supporting the economy through the pandemic.
Nevertheless, the ten-year treasury yield TMUBMUSD10Y,
shot above 1.50% on Thursday, cracking stock market investors. The S&P 500 SPX,
is down 1.8% this week, while the Nasdaq Composite COMP,
tumbled 4.5% over the same piece.
Read: Fed’s Powell says the economy could improve later this year, but sees no change in policy
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Perhaps more than the outlook for the Fed’s policy, a major driver of bond market sales is that investors are asking for more returns to offset the risks surrounding increased fiscal spending, growth and inflation in the future, says Al-Hussainy. .
The most important way to measure this compensation is through the term premium.
Bond market analysts say the yield on a mortgage consists of the term premium and the future path of short-term interest rates. The former measures how much extra compensation investors need in exchange for the risk of owning longer-term bonds than their short-term counterparts.
This is because long-term treasuries are vulnerable to uncertainty about how economic growth and inflation may develop over time, an increasingly urgent issue as trillions of fiscal relief and a heap of consumer savings increase the risk that an economy that is at all cylinders shoot, the wreck of the COVID-19 pandemic could arise.
The futures premium is now at a positive 28 basis points on Thursday, after hitting a negative 88 basis points in August, according to data from the Fed branch in New York.
In this regard, Al-Hussainy said it could reflect the success of the central bank’s new framework, which aims to raise inflation above 2% for a long period of time before easing the pedal.
“There really is no appetite at the Fed to prevent” rising yields, “he said.
Also read: Did Powell lose control of returns or is the latest boom part of the Fed’s playbook?