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Investors may be set to relive memories of the infamous bond-market ‘taper tantrum’ of 2013 when U.S. Treasury yields rose after investors learned that the Federal Reserve was slowly putting the breaks on its quantitative easing program of bond buying.
That’s a “real risk” according to Jefferies chief financial economist Aneta Markowska who warns the benchmark U.S. 10-year note yield TMUBMUSD10Y, 1.052% could spiral higher as Democratic candidates look set to win the two U.S. Senate runoff elections in Georgia.
In a Wednesday note, Markowska estimates the benchmark maturity could now climb to 2% at the end of this year as investors turn to the possibility that the Federal Reserve may contemplate an earlier liftoff from ultra-low interest rates than had been expected.
Her allusion to ‘taper tantrums’ will reawaken painful memories for the bond bulls.
Back in 2013, the suggestion of a reduction in bond purchases by then Fed Chairman Ben Bernanke sent panic into global bond markets, and sent the 10-year yield rising around 1.40 percentage points in the span of four months.
Like then, Treasurys have been on the backfoot in recent weeks. On Wednesday, the 10-year note climbed 9.4 basis points to 1.05%, while the 30-year bond yield TMUBMUSD30Y, 1.829% surged 12.7 basis points to 1.831%. Both long-dated maturities reached their highest levels since March.
See: Warnock projected to win Georgia Senate race, as Ossoff clings to slim lead
Markowksa says investors will start to price in an earlier end to the Fed’s ultra-accommodative policy if they anticipate the administration of President-elect Biden, with the aid of a Democratic-controlled Congress, will introduce more fiscal stimulus to bolster economic recovery.
She expected an additional fiscal package of another $1 trillion, on top of the $900 billion coronavirus relief bill signed in December.
Under her new calculations, U.S. economy growth would rise and the unemployment rate would fall to 4% next year.
Inflation, in turn, would climb to the Fed’s target of 2% around in early 2023, positioning the U.S. central bank to start lifting interest rates around then, a full year ahead of schedule.
The Fed’s dot plot, a survey of what its panel of policymaking officials forecast where interest rates are headed, shows the majority of its members expect the federal funds rate to start rising in 2024.
