Tantrum without a Taper!

Should we be worried on the rising US bond yields?

Markets have an uncanny way to come up with a catchy phrase that sometimes gains so much adulations that it becomes a defining one. In early 2013, when Fed signaled that it is going to stop buying bonds (reversing quantitative easing) in a phased manner, 10 year yield surged, equity markets tanked and currencies crumbled. This tumultuous turn in the markets came to be known as “taper tantrum” subsequently. This phrase became so catchy that it stayed in market’s dictionary to define any yield related jitters in the equity markets, esp. the ones that get triggered by Fed’s policy priming.

Since the crash was brutal across the asset classes in 2013, it left a severe scar in investor’s memory. As a result, any abnormal movements in US ten year yield, even those not caused by Fed policy stance, started to leave a severe dent on equity markets because the rising yield brought the fears of 2013 brutal crash. Currently we may be going through one such phase. Yields in US are moving up, not because Fed has changed its policy stance (of aggressive bond buying), but because of expected rise in supply of Govt. papers on hefty fiscal stimulus from the Biden administration. Basically yields are moving up not because of “taper” worries (gradual reduction of bond buying by Fed), but because of supply worries. But markets, weighed by 2013 fears, are witnessing wild swings. This is more like tantrums without a taper.

Now, let us see why these taper-less tantrums are a passing phase of the bull market and as a result, why investors need not be overly concerned with the rising yield. To understand this, let us look at how historical data points weigh, esp. in the 2009-12 bull cycle. If one plots the ten year US bond yields from start of the QE program in 2008 (starting period of Fed’s bond buying to support the markets) to the point of taper in 2013 (when Fed signaled reduction of bond buying), one would witness an interesting pattern (ref. below chart).

In 2008, the Fed launched four rounds of QE (bond buying program) to fight the financial crisis. It began in Dec’2008 and lasted till early part of 2013 when Fed started the process of unwinding (tapering). In this period, the ten year yield fell from near 4% to over 1.5% on aggressive bond buying from Fed. As it always happens with any trend, it was not a straight and linear fall. It was with many intermediate tops and bottoms. But as a trend line, it was down all through, though there were many false alarms (rising yield) in this period.

Now, coming back to the present, occurrence of similar intermediate tops and bottoms is par for the course in the journey of Fed’s yield management and need not be a cause of worry for investors. From this perspective, the current rise in the ten year yield (from 0.9% level in Oct to over 1.50%+ as on 26th Feb), is likely to be a passing phase than a defining one, though have created jitters in the market. It is more of tantrum without a taper akin to the one in the chart. Going by the signals coming out of Fed, tapering is unlikely to start unless growth returns to its potential rate of 3% or inflation spikes to well over 2%+. Neither of these is likely over the medium term (over two years+), though one can’t be too sure about anything in the financial markets. While one should watch out for either of these two scenarios, this is not time for bulls to lose grip as liquidity is unlikely to reverse any time soon. Prospects for action in broader markets (esp. in India) are brighter as the rally is set for the next leg, though rising yield in India will keep a check on the momentum.

This article of mine was published in the online edition of Businessworld. Glad to share the link:http://www.businessworld.in/article/Tantrum-Without-A-Taper-Should-We-Be-Worried-On-The-Rising-US-Bond-Yields-/18-03-2021-384181/

Bond Market Blues (Supply Concerns)?

Market View:

For the equity markets, budget had two effects. One, the direct effect and the second, feed-through effect via bond markets. First one has been hugely positive as can be seen from the stupendous rally in the indices since the presentation of the budget. On the second feed-through effect from the bond space, market is facing some uncomfortable reality check in terms of rising yield. RBI’s extraordinary liquidity measures thro’ the pandemic period kept the yield low and the trajectory down. Though RBI has not changed the liquidity or accommodative stance, pressure on the yield is coming from the supply side fears as the Govt. is planning to step up its spending thro’ extra-ordinary fiscal measures by loosening its purse strings, not just for this year, but for at least couple of years to come. With fiscal deficit expected to be at elevated levels for next few years (over 6%+), supply of govt. bonds is likely to see a sharp surge with Govt.’s increased borrowings plan from the markets. Signals from bond markets are crystal clear. From the day of budget, the 10 year bench-mark yield (India G-sec) has moved by over 30bps from 5.9 to over 6.20%+ level. Consequently, this has impacted the spread negatively for the borrowers across various categories, effectively increasing the interest rates in the system.

While RBI is trying to comfort the markets by signaling that it will do what-ever it takes to manage the liquidity and the Govt.’s borrowings without any major disturbances in the bond yields vide OMO (Open Market Operations) and other tools, bond markets have so far ignored this. But given the variety of tools available with RBI, one doesn’t or should not expect yield to spike far beyond this, unless inflation trajectory surprises. Though not an immediate concern for the equity markets given the liquidity stance of RBI, this bond market pain, coming at a time when US ten year yield is under strain on similar supply concerns of treasury papers, will keep a check on the momentum for a while.