An increase in Treasury yields will encourage the profitability of a ‘tantrum’ for markets

The recent rise in bond yields and the prospect of U.S. inflation have led some investors to fear that a repeat of the 2013 “taper tantrum” could be on the horizon.

The U.S. 10-year Treasury benchmark note climbed above 1.3% for the first time since February 2020 earlier in the week, and the 30-year bond hit its highest for a year. Yield shifts abruptly to bond prices.

Yields tend to rise in a gray phase with inflation expectations, which have reached their highest levels in a decade in the U.S., driven by increased opportunities for a major fiscal stimulus package, progress on vaccine distribution and pent-up consumer demand.

The “taper tantrum” in 2013 was a sudden spike in Treasury yields as a result of a market shock after the Federal Reserve announced it would begin tapering its quantitative discount program.

Major banks around the world have cut interest rates to historic levels and launched unprecedented volumes of asset purchases to try to spread the economy across the pandemic. The Fed and others have held tons of support in recent policy meetings, voting to keep financial conditions loose as the global economy looks out of the Covid-19 pandemic.

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

With the support of the central bank removed, bonds usually fall in price which leads to a higher yield. This can also spill into stock markets as higher interest rates mean more debt servicing for companies, causing traders to reevaluate the investment environment.

“The supportive stance from policymakers is likely to remain until the vaccines have returned to normalcy,” Shane Balkham, chief investment officer at Beaufort Investment, said in a research note this week. .

“However, there will be a risk of another taper tantrum similar to the one we saw in 2013, and this is our main focus for 2021,” said Balkham, if policymakers begin to relinquish the impetus seo.

Long-term bond yields in Japan and Europe followed U.S. Treasurys higher near the weekend as property owners moved their packages.

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

“So much tapering has helped the United States with better retail sales after four months of disappointment and the expectation of a major release from the $ 1.9 trillion fiscal package.”

Galy suggested that the Fed would likely extend the period on buying assets, reversing the upward trend in inflation.

“Equity markets have treated negatively with higher yields as it offers an alternative to share yields and higher discounts in the long run, making them more focused on medium-term growth such as bicycles. “he said. Wheels are stocks whose performance tends to align with economic cycles.

Galy expects this process to be more marked in the second half of the year as economic growth picks up, increasing the chance of a downturn.

Allianz CEO Oliver Bäte told CNBC on Friday that there was a geographical divide over how the German insurer thinks about the plans for raising interest rates.

“One of them is Europe, where we are still experiencing a recession, where the ECB continues to buy up to the maximum to reduce north – south emissions. reduction – the strong balance sheets and the weak ones – and at some point someone will have to pay the price for that, but in the short term I don’t see any spike in flat rates, ” Bäte said, adding that the situation is different on the state side.

“Given the big programs that have taken place, the stimulus that is happening, the dollar as the world’s reserve currency, it is clear that there is a movement to steal inflation and it is going to come. Again, I don’t know when and how, but the flat rates have been going down and they should go further. “

However, not all analysts are convinced that the increase in bond yields is relevant to markets. In a note on Friday, Barclays Head of European Equality Strategy Emmanuel Cau suggested that bond yields were rising late, as they had weakened the growing macroeconomic outlook for a second half of 2021, and said they were a “normal feature” of economic recovery.

“With the main drivers of inflation pointing out, the expectation of even more fiscal stimulus in the U.S. and rising demand driven by excessive savings, it seems right for bond yields to catch up. with other more advanced rebalancing trades, “Cau said, adding that central banks remain” firmly “in the face of a balance of risks.

He said the steep yield curve is “normal at early stages of the cycle,” and as long as vaccine distribution is successful, growth continues to tick up and central banks remain cautious, reflationary movements across classes assets look “reasonable” and should be available at higher rates.

“Indeed, after a strong move in the last few weeks, quotas could indicate a stop because many sectors that have accumulated yield look too much, such as commodities and banks,” Cau said.

“But at this point, we believe rising yields are more of a test of an opportunity bull market than a threat, so dips should still buy them.”