(The author is the editor-in-chief of finance and markets for Reuters News. The views expressed here are his own.)
LONDON, Feb 26 (Reuters) – If there is no taper, why the tantrum?
An increase in government bond yields this month and a related shift in equities on markets reverts to the 2013 “tantrum taper” – when the Federal Reserve is expected to reduce its bond purchases nearly doubled 10-year U.S. Treasury yields in four months and shortened world shares by 10%.
This year’s trends, so far, are less than half that size, and the promising comparison runs further ashore.
Eight years ago, the Fed was indeed marking a cutback of its monthly bond purchases, which have been in place since the 2008 banking crash. This year, there is little chance of it doing so. If anything, central banks could double with discounts.
So what is eating the link market?
There are fears that, as the pandemic ends, trillions of dollars of government spending and money creation will reverse inflation to more than the Fed ‘s target of an average rate of 2% over time. Until this week at least, stock prices and bubble-like commodities also went down from stimulus and inflation.
But that is only part of it.
Five- and 10-year inflation expectations are hovering in bond markets back up 2.0-2.5% – almost alarming and unwelcome by Fed which has struggled to meet its 2% target. performance for much of the last decade and, following its recent strategy review, much for rebalancing that long subscription for some time.
In addition, a preferred market criterion – five-year / five-year inflation exchanges – reflects expectations of nearly 75 basis points below the 3% levels hit in 2013 and is he now suddenly falls back again.
Fed chief Jerome Powell told Congress this week that the U.S. central bank was pleased to see through a temporary spike in mainline inflation to 3% or more later this year, as the economy reopens after the pandemic. A bigger reward ensured that activity was getting back enough so that everyone could get back to work.
It may take inflation 2% higher than a kick after COVID more than three years, Powell said. Clearly a man is in no hurry to raise flat or taper levels.
Market economists tend to disagree about its inflation assessment.
“This is a temporary inflation spike that investors should not overlook,” said UBS economist Paul Donovan, dismissing an expected rise in the spring due to underlying effects from oil prices.
The impact of the reopening of service sectors such as travel and leisure and retail may be more significant at the end of this year, he said, but it will be dangerous to read too much into core inflation anywhere until normalizing economies.
SO WHY IS THE SULK?
In context, the U.S. 10-year nominal yield is only back to where it was 12 months ago – even though trillions of dollars of extra government loans would get a shoulder and go. despite some $ 120 billion a month of Fed purchases.
On the one hand, it may not be a bad thing if much higher rates puncture stock market bubbles. But tighter credit conditions will certainly come under fear if post-pandemic redistribution slows.
With inflation also fluctuating at six-month highs, it is clear that this is not about inflation.
And with Treasury bill yields and money market rates tied to zero by a flood of cash liquidity, this is not the result of any short-term credit pressure. The market is full of money – something that some inflation carriers fear.
Many are looking at the mechanics of Treasury debt sales.
In preparation for $ 1.9 trillion of Biden government fiscal stimulus, the Treasury is starting to run down its Fed’s $ 1.6 trillion bank account and pay down hundreds of billions of Treasury bills, leaving a shortage of bills without risk for money and cash rates as a result. tethered at zero.
Less bill sales compared to pounds and long-term bonds in the Treasury funding mix partly explain the steepest yield curve between two and 30 years since 2015.
Neil MacKinnon, VTB Capital’s Global Macro Strategy, believes the Fed may be hoping that fundraising will move down the curve to limit long-term yields – or that zero bill levels will increase. encourages the Treasury to shorten its average rate to take pressure. off the long end.
The bond market could then stabilize if the Treasury raises the ratio of debt-raising bills and the Fed expands further maturity of bond purchases.
The average maturity of Treasury debt is 65 months, down from 70 months before COVID-19 hit but up from the July pool of 62 and more than two months more than the 20-year average. The average maturity of Fed Financial Holdings is approximately 89 months.
If the bond market tantrum is more about supply dynamics than Fed pressures or real inflation concerns, it will be even bigger than in 2013.
“It is fair to say that the US reflation trade has gained ground in the short term,” said Eva Sun-Wai, manager of the M&G World Government Bond Fund. “But once the noise dies … those legs may not be as long as markets currently think.”
by Mike Dolan, Twitter: @reutersMikeD; Edited by Catherine Evans