The vicious rise in bond yields in recent weeks is drawing comparisons to bond market sales of a similar magnitude, most notably the 2013 ‘tantrum’, but analysts say this analogy falls short on a crucial measure.
The “courage” of the recent settlement was different because the higher yields on the bonds were the result of the panic of market participants 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 expectations around interest rates and Federal Reserve policy.
“We are a kind of mental reference for the tantrum. But in many ways, what is happening is significantly worse, ”said Ed Al-Hussainy, senior interest and exchange rate analyst at Columbia Threadneedle Investments, in an interview.
“At the time of the reduction tantrum, the Fed was preparing to reduce quantitative easing. We haven’t started the conversation yet, ”said Al-Hussainy. This suggests that if expectations of a violent turn were actually priced in the bond markets, the pain at the Treasury might have more room to run.
To see: 3 reasons why rising bond yields are gaining momentum and shaking the stock market
Defining tantrums as episodes in which the 30-year Treasury note yielded TMUBMUSD30Y,
rose about 100 base points from the valley to the peak, he noted that three met this definition – 2013, 2015, 2016.
During these tantrums, expectations about Fed policy changed rapidly, especially in 2013, when the mere suggestion of a reduction in asset purchases by former Fed Chairman Ben Bernanke was enough to cloud the bond markets .
But this time, the Fed has consistently stuck to its message that it is unlikely to think about 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, underlined their commitment to supporting the economy during the pandemic.
However, the 10-year Treasury bill yielded TMUBMUSD10Y,
skyrocketed above 1.50% on Thursday, shocking stock market investors. The S&P 500 SPX,
fell 1.8% this week, while the Nasdaq Composite COMP,
fell 4.5% in the same stretch.
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Perhaps more than the outlook for Fed policy, a major driver of the bond market’s sale boils down to investors asking for more yield to offset the risks surrounding rising fiscal spending, growth and inflation in the future, he said. Al-Hussainy.
The main way to measure this compensation is through the term premium.
Bond market analysts say the yield on a bond is made up of the term premium and the future trajectory of short-term interest rates. The first measures how much extra compensation investors need in exchange for the risk of owning longer-term securities instead of their shorter-term peers.
That’s because Treasury bonds with extended maturities are vulnerable to uncertainty about how economic growth and inflation could develop over time, an increasingly urgent issue, as trillions in fiscal relief and a lot of savings from consumers increase the risk that an economy spinning on all cylinders could emerge from the debris of the COVID-19 pandemic.
That term premium is now at 28 bps on Thursday after hitting a negative 88 bps in August, according to data from the New York Fed agency.
In that sense, Al-Hussainy said that this could reflect the success of the new central bank framework, which aims to raise inflation above 2% for a sustained period before slowing down.
“There is really no appetite at the Fed to cope” with rising bond yields, he said.
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