Needless to say, there’s been no shortage of speculation this year about yields and where they’re headed now that markets seem convinced (until yesterday that is) that the reflation trade will be alive and well for the foreseeable future.
Some observers fear a sudden, sharp move higher mid-year. Should that transpire, the question becomes: to what extent will the impulse sent by YCC in Japan and Bundesbank bund buying offset the signal US 10s are sending? It’s a push pull dynamic in a world where Fed policy is quickly decoupling from that of the FOMC’s G3 peers.
There’s some debate as to when the great bond bull market will officially be history. The new bond king says 3%, the old bond king says 2.6%. I’m less interested in that than I am with the possibility that panic selling in the US triggers a global VaR shock (à la the Japan experience in 2003, the US taper tantrum in 2013, and/or the great bund battering of May, 2015).
So that’s the backdrop for this morning’s “chart check” which puts the recent repricing of yields in context by comparing it to the infamous taper tantrum. Draw your own conclusions…
(Chart: Bloomberg, DoubleLine)
For those who missed it last week, here’s some relevant color from Deutsche Bank:
We believe the US long-term yield upswing might overshoot around mid-year if risk-off activity (described in risk scenario (1)) does not curtail yield upswing. If the US 10y yield moves sharply higher (to 3.6% in 2Q) as forecast by our rates research team, we expect increased selling pressure on the US Treasuries by the US banks (unrealized losses in bond portfolios lower the CET1 ratio), agency REITs, and other funds (which hold large amounts of mortgage-backed securities), Japanese financial institutions (which need to conduct loss-cutting bond sales), and the PBOC (which continues to sell US Treasuries as currency intervention). Leverage regulations, electronic trading, and other factors are reducing liquidity in bond markets. We are focusing on possible overshooting too. Many investment managers lack experience in markets with unleashed upswing in the long-term yield, and this environment might trigger panic selling of government bonds and mortgage bonds.