Wall Street is talking a second “taper tantrum.”
In 2013, then Federal Reserve Chairman Ben Bernanke announced that the Fed would taper, or gradually reduce, its bond-buying program that pumped money into the financial system.
Investors freaked out and dumped bonds, which in turn spiked yields.
Fixed income is selling off again, especially in emerging markets, sending yields higher this month.
“Investors are contemplating the risk of a renewed ‘taper tantrum’ in EM as core bond yields have moved modestly higher in September, with regional rates moving in sympathy and EM equities and FX weakening,” wrote Andrew Tilton, chief Asia Pacific economist at Goldman Sachs, in a note on Monday.
There are two main catalysts that Morgan Stanley’s James Lord and Hans Redeker identified in a note on Monday.
First, the European Central Bank surprised markets earlier in September when it declined to extend its quantitative-easing program past the March 2017 expiration.
The second is speculation about the Bank of Japan’s policy meeting on Wednesday. There’s concern that the BOJ could again shock markets by indicating it will buy fewer longer-dated bonds, which could lift yields and subsequently steepen the curve.
Additionally, Tilton noted that improving economic growth in emerging markets is part of what’s reducing demand for bonds and lifting yields.
Emerging-market surveys including Markit’s composite purchasing manager’s indexes have recently jumped in emerging markets, but are little changed in developed markets.
Amid all the talk of another taper tantrum, Morgan Stanley’s strategists do not think this is another one.
“We believe that the recent back-up in core yields is not going to develop into another EM taper tantrum,” Lord and Redeker wrote.
“EM macro resilience has increased since the 2013 bond market sell-off, while global growth dynamics are more synchronised between DM and EM.”
Even with the recent improving economic picture, the backdrop of low growth and inflation would likely keep yields contained, according to Barclays’ Rajiv Setia in a note last week.
If yields continue rising, it could have less of a weakening effect on emerging-market currencies, because many of the countries are experiencing growth, Morgan Stanley noted.
Citi’s Dirk Willer made a similar point.
“Interestingly, usually EMFX trades well during steepening episodes,” Willer wrote in a note on Monday. “The reason is that steepening is often associated with stronger oil prices, and, at times, growth optimism and higher risky asset prices.”
Willer also thinks the current market moves will eventually reverse.
“In particular, we don’t think that the ECB will taper, we do think that eventually the BOJ will still ease, and we think the Fed will continue to go extremely slowly,” he wrote. “Therefore, this current episode is unlikely to be a repeat of the tapering of 2013.”
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