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.