The violent rise in bond yields in recent weeks is drawing comparisons to bond market sell-offs of similar magnitude, most notably the ‘taper tantrum’ of 2013, but analysts say this analogy falls short by a crucial measure.
The “innards” of the recent selloff were different because higher bond yields were the result of panicked market participants demanding higher interest rates on longer-term bonds to offset the risk. growth and inflation. In contrast, previous bond market tantrums were fueled by expectations around interest rates and Federal Reserve policy.
“We are a mental benchmark for the conical tantrum. But in many ways, what is happening is significantly worse, ”Ed Al-Hussainy, senior currency and interest rate analyst at Columbia Threadneedle Investments, said in an interview.
“At the time of the tune-up tantrum, the Fed was preparing to cut quantitative easing. We have not started the conversation yet, ”Al-Hussainy said. That suggests that if expectations of an aggressive turn were really discounted in bond markets, the pain in Treasuries might have more room to run.
Watch: 3 Reasons Rising Bond Yields Are Gaining Traction And Shaking The Stock Market
Defining tantrums as episodes in which the 30-year Treasury yields TMUBMUSD30Y,
increased by around 100 basis points from a low to a high, noting that three met that definition: 2013, 2015, 2016.
During those tantrums, expectations around Fed policy shifted rapidly, especially in 2013, when the mere hint of a decline in asset purchases by former Fed Chairman Ben Bernanke was enough to shake up the bond markets.
But this time around, the Fed has consistently stuck to its message that it was unlikely to contemplate reducing its asset purchases and raising interest rates.
Throughout this week, senior Fed officials, from President Jerome Powell to Kansas City Fed President Esther George, have underscored their commitment to supporting the economy during the pandemic.
However, the 10-year Treasury bond yields TMUBMUSD10Y,
spiked above 1.50% on Thursday, shaking investors out of the stock market. The S&P 500 SPX,
is down 1.8% this week, while the Nasdaq Composite COMP,
it has fallen 4.5% in the same section.
Read: Fed’s Powell says economy could improve later this year, but sees no change in policy
Check out: Fed’s Williams says he expects inflation to remain subdued despite strong growth ahead
Perhaps more than the outlook for Fed policy, a big driver of the bond market sell-off comes down to investors asking for more yield to offset risks around rising tax spending, growth and inflation in the US. future, Al-Hussainy said.
The main way to measure this compensation is through the term premium.
Bond market analysts say that the yield on a bond is made up of the term premium 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 longer-term bonds on their shorter-term peers.
This is because long-maturity Treasuries are vulnerable to uncertainty about how economic growth and inflation could develop over time, an increasingly pressing issue as trillions of dollars in tax relief and a large amount of Consumer savings increase the risk that a skyrocketing economy could emerge from the remnants of the COVID-19 pandemic.
That term premium is now 28 basis points positive as of Thursday, after posting a low of 88 basis points negative in August, according to data from the New York Fed branch.
Along those lines, Al-Hussainy said it could reflect the success of the central bank’s new framework, which aims to raise inflation above 2% for a sustained period before releasing the pedal.
“There really is no appetite at the Fed to anticipate” rising bond yields, he said.
Also read: Has Powell lost control of yields or is the latest increase part of the Fed’s playbook?