“So much of the rally in equities was built on easy money,” Bloomberg’s Eddie van der Walt wrote Friday. “Higher rates could be a real spanner in the works.”
That pretty much summed things up as equities looked to fight back after being staggered Thursday by a brutal bond rout weeks in the making. Thursday felt like the culmination, and the hope is that rates will calm down, allowing stocks to stabilize.
Asian shares were bludgeoned Friday. Most regional benchmarks posted steep declines, with tech shares hit especially hard.
The Bank of Japan was “forced” (if that’s the right word) to buy JPY50.1 billion in ETFs Friday. The purchases marked the first buying since January 28 and came ahead of the bank’s policy review, which BOJ watchers have spent the last several weeks speculating on.
Policymakers may have seen enough from the “bond vigilantes.” Isabel Schnabel, for example, fired a warning shot at them Friday. “A rise in real long-term rates at the early stages of the recovery, even if reflecting improved growth prospects, may withdraw vital policy support too early and too abruptly given the still fragile state of the economy,” she remarked, during a virtual event. “Policy will then have to step up its level of support.” Schnabel runs the ECB’s market operations.
There was plenty of chatter on finance-focused social media Thursday about the bond market “running faster” than central banks. That’s just pomp from people who don’t trade or else not in enough size to matter. Nobody wants to get steamrolled by Schnabel or by the RBA. It’s true that the latter struggled this week as the market tested its commitment to yield-curve control, but it’s important to keep in mind that this isn’t a matter of who’s stronger. It’s a battle of wills.
Developed market central banks can crush ants with sledgehammers any time they please. They are, after all, currency issuers and they set policy rates. Of course, they like to maintain the charade that markets are still markets and that they haven’t totally killed price discovery (they have), so they’re loath to roundhouse or dropkick adventurous bears. But if would-be “vigilantes” press their luck, it will run out — the luck, that is.
In Japan, Finance Minister Taro Aso said “it’s important that yields don’t suddenly jump up and down.” You laugh. Because it’s funny. But the message is clear. Slow and steady rate rise is fine. Even desirable depending on the context. But a market that persists in tantrum-like behavior will eventually be treated like an unruly toddler.
The RBA on Friday announced an unscheduled bond-buying operation for A$3 billion of 2023 and 2024 bonds. 10-year Aussie yields richened dramatically after the announcement, but eventually gave it back. Bloomberg noted wide markets in “a testament to poor liquidity.” Apparently, Aussie bonds are poised for their worst month since 1994.
“While bond investors anticipated higher yields, the pace and timing of the selloff were a surprise,” SocGen’s Subadra Rajappa remarked. “All tantrums come to an end after inflicting pain, and we seem to be reaching a pain point.”
The irony in all of this is that markets may be arguing for their own extinction. And thanks to circumstances, policymakers could insist it’s necessary for societal progress and the preservation of the species.
“If central banks are forced to do whatever it takes and step up QE even further, in combination with yield-curve control, then markets would have successfully forced us to into a genuine revolution without a shot being fire,” Rabobank’s Michael Every said Friday.
“There would still be unlimited liquidity for equities… and there would also be a guarantee of low yields across the curve, so governments could fund the repair of society, and corporate credit spreads could come in further,” Every added, before flagging one “small” problem. “We would lose the function of market price discovery – and never be able to go back again without a systemic crash.”
Be careful what you wish for, vigilantes. You might get it.
(For more on the above, I’d arrogantly recommend my own “Yen And The Art Of Bridge Maintenance.”)