Beginning in May 2013, the ‘taper tantrum’ hit markets following choice words from then Federal Reserve chair Ben Bernanke that the central bank was eyeing to slow and eventually end its quantitative easing programme in the near term.
According to FE Analytics, global bond markets suffered as a result of the news with investors jettisoning exposure. Corporate bond markets in the US, eurozone and the UK as well as sovereign debt of these three key markets all finished the year down. Emerging market debt was hit even harder.
Performance of indices since May 2013
Source: FE Analytics
The panic spread to other asset classes with the MSCI Emerging Markets index one of the worst hit. The index has also only just made up the lost ground, leading some to question whether a more attractive entry point is around the corner.
Performance of indices in since 2013
Source: FE Analytics
While all of the key fixed income markets eventually recovered, they have been heading south since February 2015 when volatility began to rapidly increase and all are down since then.
John Bilton, global head of multi-asset strategy at JP Morgan Asset Management, says comparisons of today’s bond market volatility to the 2013 taper tantrum are not accurate.
“During the taper tantrum in May 2013, US 10-year yields jumped 100 basis points over seven weeks, implied volatility in German bunds doubled and European equities fell 11.4 per cent. Over April and May this year, US 10-year yields are up 65 basis points, bund volatility has almost trebled and European stocks are 8 per cent off their highs,” he said.
“So, déjà vu all over again, then? We don’t think so, but we do acknowledge that the market narrative – especially in fixed income markets – is entering a new regime.”
He says there are several key differences between 2015’s volatility and the 2013 taper tantrum.
“First, in terms of market price action, the contagion effect is smaller. Notably, credit markets are better behaved this time; while it is true that credit has started to trade a little ‘heavy’ of late, we believe it can be largely explained by the issuance calendar.”
“Second, in contrast to the taper tantrum, central bankers around the world are at great pains to reiterate that their reaction function has not changed. In the US, at least, it appears the market is responding to the turn in data, not to a change in how the Fed reacts to the data.”
“While there are passing similarities between the recent sell-off in bonds and the taper tantrum, the drivers are quite different. Credit markets and emerging market debt, in particular, suffered a significant drawdown over the taper tantrum, but are holding up quite well through the current move. In part this reflects the less extended positioning, better spread levels and more measured sentiment in the asset classes going into the current rates sell-off.”
Schroders’ Gareth Isaac, manager of a host of fixed income portfolios totalling £6bn, agrees that yields are heading up very quickly but says that as they were “dangerously low”, volatility should fall as markets move towards lower prices for government bonds.
“Many popular or crowded trades have been washed out by the volatility and the market positioning is a lot cleaner. As long as interest rates remain at or near zero, cash is not a viable option for investors. Once volatility has abated, investors should begin to step back into the market,” he said.
Nonetheless over the longer term, he says, periods of volatility are likely to become more common particularly of the form seen during the 2013 taper tantrum.
“The recent turmoil is a sharp reminder of how illiquid the bond markets can be in times of stress. What we have seen may be a small indication of what we can expect if and when interest rates do begin to rise. As European Central Bank [ECB] president Mario Draghi suggested in early June, volatility in the bond market is something we are going to have used to.”
However, Isaac says this year’s bond market falls are healthy in part while he is expecting the rise in government bond yields to slow and corporate bonds to move upwards.
“The steep bond market sell-off since April has made a number of investors nervous, but this weakness should be viewed in the context of an overextended rally. The most vertiginous rises in yields have been in Europe, where bond yields became detached from reality.”
“European fixed income has been acting as an anchor for other bond markets and now that yields are rising, the same has begun to happen elsewhere. However, while the move in yields has been rapid, valuations have only moved back to ‘expensive’ from ‘very expensive’”.
“In our view, the medium-term outlook for fixed income still looks strong. The deposit rate at the ECB is still negative, at -0.20 per cent, and the structural demand for income by European investors should keep yields from rising too far. And let’s not forget that the ECB will continue its bond buying programme, at a rate of €60bn a month, until at least next September. In our view, we are unlikely to see headline interest rates rise in Europe for possibly years to come.”
The market saw the largest weekly bond outflows since the taper tantrum began to ease 18 months ago, according to a BofA Merrill Lynch Global Research report, while revealed that $5.9bn was pulled from bond funds last week.
“Using as [a] guide the past four episodes of disorderly retail bond redemptions – Fed hikes in ’94 & ‘99, financial crisis in '08 and taper tantrum in '13 – big disorderly outflows from credit funds tend to be preceded by a 3-5 per cent sell-off in both high yield and government bonds over a two-month period; and on average retail investors redeemed more aggressively from high yield bond funds than from government bond funds,” the report said.
