Through its QE programme the Federal Reserve had been on the bid position for Treasury securities since 2009. When it was announced that this economic life support would be withdrawn over the following ten months, the markets panicked and as a result bond prices crashed and yields rocketed before stabilising shortly after.
This week the markets became concerned that the European Central Bank might begin to implement a similar tapering and what I have seen is initial signs of a return of the ‘taper tantrum.’ Bond yields across Europe, and globally, rose earlier this week as investors panicked that Central Banks would move away from the bid; monetary action has been supporting price increases in government bonds and pushing yields well into negative territory.
The questions therefore are what is the difference between now and 2013? And can we expect markets to settle shortly again today as they did then?
Well, the fundamental difference between the US and the EU is that when Mario Draghi announced the European Central Banks’s equivalent monetary easing in January 2015, many European 10 year yields were already falling and, at 1.5% on some 10 year government bonds, were about half that of the equivalent US yields when the Federal Reserve announced its own QE programme. From an already lower base, we have since seen yields fall further than those seen in the US in 2013, and in fact they have reached historic lows and even negative yields in many economies.
Historically low yields, record asset purchases and extreme volatility leads me to believe that, should the European Central Bank follow through with any plans to taper down its bond purchasing from March 2017, then this taper tantrum might be greater and more painful than the last.