We assess the mood in bond markets as central banks once again start to focus on tapering quantitative-easing programs.
Key Points
- Central banks are once again talking about reducing the rate at which they will continue to buy bonds through their various quantitative easing (QE) programs.
- Investors appear more sanguine than during the ‘taper tantrum’ in 2013.
- Potential tapering has been better flagged this time, with central-bank messaging so far suggesting no rapid rate hike will follow on the heels of the tapering.
- Investors will continue to be more concerned about concrete details of any acceleration in the rate of tapering, persistent inflation, and the timing of actual rate rises.
- We think a diversified approach to fixed income that allows some shorting ability is prudent to navigate potentially turbulent markets.
As the tentative post-pandemic recovery continues, central banks are once again making plenty of noise about reducing the rate at which they will continue to buy bonds through their various quantitative-easing (QE) programs.
This new round of ‘taper talk’ is markedly different to the last one back in 2013, when the so-called ‘taper tantrum’ was greeted by significant market unease and volatility. By contrast, so far, bond investors in 2021 appear to be more sanguine. Why?
First, potential tapering has been better flagged than last time. This time round, central-bank messaging, so far, suggests the process of reducing asset purchases will be more drawn out than in 2013, and that when the tapering process does begin in earnest, there will be no rapid rise in interest rates following on its heels. Investors will continue to be more concerned about concrete details of any acceleration in the rate of tapering, and, most importantly, when the actual rate rises occur.
Trigger Point Q1 2022?
The trigger for rate rises is likely to be when there is clearer visibility on employment levels, which will remain dependent on the successful transition of economies. Employment statistics are currently displaying confusing signals as economies adjust from a pre to post-Covid world, and we would anticipate greater clarity around the direction of job numbers as government support packages start to drop away.
Our expectation is that it probably won’t be until the first quarter of next year that central bankers get a clear idea on when they need to adjust monetary policy beyond simply slowing down their bond-buying programs.
QE a More Permanent Tool
The authorities’ attitude to QE has hardened over recent years, and it has long since moved from being a temporary measure to a more permanent central-bank tool. This is especially the case if you consider the sheer scale of many countries’ budget deficits and the current amount of government issuance. Continuing government support for economies will be required to aid the transition to a post-Covid world, but the cost of this cannot be allowed to grow too high. Therefore, we would expect central banks to be concerned with keeping borrowing costs lower by maintaining some involvement via their QE programs.
Inflation Concerns
We anticipate that inflation will be another key concern for bond markets over the next six months. Many of the short-term factors that have driven inflation higher are likely to fall back, but it is unlikely that we will end up with inflation back within the range that we saw before the Covid crisis. Upward pressures on inflation can best be summarized as a continued adjustment to Covid by the major economies. Transportation costs are climbing, energy prices have shot up, and cyclical inflation is building.
At times in the coming weeks and months (as we saw in the first quarter of this year), we would expect markets to again be surprised by central-bank conversations about a tightening of monetary policy, but we would anticipate most related volatility to come from actual rate increases rather than tapering. We believe this backdrop underlines the importance of a diversified approach to fixed-income markets that allows for some shorting ability as the most effective way to navigate potentially turbulent markets ahead.
Authors
Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell this security, country or sector. Please note that strategy holdings and positioning are subject to change without notice. This is a financial promotion. Issued by Newton Investment Management Limited, The Bank of New York Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Newton Investment Management Limited is authorized and regulated by the Financial Conduct Authority, 12 Endeavour Square, London, E20 1JN and is a subsidiary of The Bank of New York Mellon Corporation. ‘Newton Investment Management Group’ is used to collectively describe a group of affiliated companies that provide investment advisory services under the brand name ‘Newton’ or ‘Newton Investment Management’. Investment advisory services are provided in the United Kingdom by Newton Investment Management Ltd (NIM) and in the United States by Newton Investment Management North America LLC (NIMNA). Both firms are indirect subsidiaries of The Bank of New York Mellon Corporation (‘BNY Mellon’). Newton Investment Management Ltd is registered in England No. 01371973. VAT registration number GB: 577 7181 95. Newton Investment Management Ltd is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940. Newton Investment Management Ltd’s investment business is described in Form ADV, Part 1 and 2, which can be obtained from the SEC.gov website or obtained upon request. Material in this publication is for general information only. The opinions expressed in this document are those of Newton Investment Management Ltd and should not be construed as investment advice or recommendations for any purchase or sale of any specific security or commodity. Certain information contained herein is based on outside sources believed to be reliable, but its accuracy is not guaranteed. You should consult your advisor to determine whether any particular investment strategy is appropriate. This material is for institutional investors only. Personnel of certain of our BNY Mellon affiliates may act as: (i) registered representatives of BNY Mellon Securities Corporation (in its capacity as a registered broker-dealer) to offer securities, (ii) officers of the Bank of New York Mellon (a New York chartered bank) to offer bank-maintained collective investment funds, and (iii) Associated Persons of BNY Mellon Securities Corporation (in its capacity as a registered investment adviser) to offer separately managed accounts managed by BNY Mellon Investment Management firms, including Newton and (iv) representatives of Newton Americas, a Division of BNY Mellon Securities Corporation, U.S. Distributor of Newton Investment Management Limited. Unless you are notified to the contrary, the products and services mentioned are not insured by the FDIC (or by any governmental entity) and are not guaranteed by or obligations of The Bank of New York or any of its affiliates. The Bank of New York assumes no responsibility for the accuracy or completeness of the above data and disclaims all expressed or implied warranties in connection therewith. © 2006 The Bank of New York Company, Inc. All rights reserved. In Canada, Newton Investment Management Limited is availing itself of the International Adviser Exemption (IAE) in the following Provinces: Alberta, British Columbia, Ontario and Quebec and the foreign commodity trading advisor exemption in Ontario. The IAE is in compliance with National Instrument 31-103, Registration Requirements, Exemptions and Ongoing Registrant Obligations.
Important information
This is a financial promotion. Issued by Newton Investment Management Limited, The Bank of New York Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Newton Investment Management Limited is authorized and regulated by the Financial Conduct Authority, 12 Endeavour Square, London, E20 1JN and is a subsidiary of The Bank of New York Mellon Corporation. 'Newton' and/or 'Newton Investment Management' brand refers to Newton Investment Management Limited. Newton is registered in England No. 01371973. VAT registration number GB: 577 7181 95. Newton is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940. Newton's investment business is described in Form ADV, Part 1 and 2, which can be obtained from the SEC.gov website or obtained upon request. Material in this publication is for general information only. The opinions expressed in this document are those of Newton and should not be construed as investment advice or recommendations for any purchase or sale of any specific security or commodity. Certain information contained herein is based on outside sources believed to be reliable, but its accuracy is not guaranteed. You should consult your advisor to determine whether any particular investment strategy is appropriate. This material is for institutional investors only.
Personnel of certain of our BNY Mellon affiliates may act as: (i) registered representatives of BNY Mellon Securities Corporation (in its capacity as a registered broker-dealer) to offer securities, (ii) officers of the Bank of New York Mellon (a New York chartered bank) to offer bank-maintained collective investment funds, and (iii) Associated Persons of BNY Mellon Securities Corporation (in its capacity as a registered investment adviser) to offer separately managed accounts managed by BNY Mellon Investment Management firms, including Newton and (iv) representatives of Newton Americas, a Division of BNY Mellon Securities Corporation, U.S. Distributor of Newton Investment Management Limited.
Unless you are notified to the contrary, the products and services mentioned are not insured by the FDIC (or by any governmental entity) and are not guaranteed by or obligations of The Bank of New York or any of its affiliates. The Bank of New York assumes no responsibility for the accuracy or completeness of the above data and disclaims all expressed or implied warranties in connection therewith. © 2020 The Bank of New York Company, Inc. All rights reserved.
In Canada, Newton Investment Management Limited is availing itself of the International Adviser Exemption (IAE) in the following Provinces: Alberta, British Columbia, Ontario and Quebec and the foreign commodity trading advisor exemption in Ontario. The IAE is in compliance with National Instrument 31-103, Registration Requirements, Exemptions and Ongoing Registrant Obligations.
