Bond prices were roiled by the Taper Tantrum of 2013. A signal from
\nthe U.S. Federal Reserve (Fed) regarding plans to \u201cstep down\u201d asset purchases led to a sudden \u2013 and
\nsharp \u2013 sell-off. Bonds, risk assets and especially emerging markets (EMs) all moved down in price
\nsimultaneously. This \u201ctaper tantrum\u201d was caused by markets badly mispricing the Fed\u2019s intentions
\nregarding short-term interest rates, despite Fed pronouncements.<\/p>\n
Now the Fed has announced it will adjust its reinvestment program later this year, selling assets to
\neventually shrink its balance sheet by $1-2 trillion. This effort toward \u201cnormalization\u201d would be yet another
\nstep in the Fed\u2019s slow and gradual exit from extraordinary monetary policy. <\/p>\n
But Western Asset Management portfolio manager & research analyst John L. Bellows Ph.D., believes
\nthat market participants will heed lessons learned in 2013 and the possibility of another \u201ctaper tantrum\u201d is
\nunlikely.<\/p>\n
\u201cThe lessons from the 2013 taper tantrum are relevant for bond investors today, but as circumstances are
\ndifferent, we do not expect a similar outcome,\u201d Mr. Bellows predicts.<\/p>\n
Mr. Bellows details this message in a recently released white paper, [\u201cFour Lessons from the Taper
\nTantrum of 2013,\u201d->http:\/\/www.westernasset.com\/us\/en\/research\/whitepapers\/taper_lessons-2017-08.cfm] available from Western Asset.<\/p>\n
Clarity of expectation and action are paramount. \u201cCentral banks have been very clear that adjustments to
\nbalance sheet policies do not signal a shift in the broader accommodative stance,\u201d Mr. Bellows writes,
\n\u201cand so far have been effective at communicating that message.\u201d<\/p>\n
A close follower of the Fed and other central banks, Mr. Bellows is an economist who served in three
\nsenior positions at the U.S. Department of the Treasury from 2009 to 2011.<\/p>\n
\u201cThe negative correlation across bonds and risk assets is likely to hold, much like it did over most of
\n2013,\u201d he writes. \u201cThe starting point matters for asset prices. EMs are notably at a better starting point
\nthan in 2013.\u201d<\/p>\n
\u201cOver the longer term, we believe markets will respond to inflation and growth, neither of which is likely to
\nbe impacted very much by upcoming adjustments to central bank balance sheets.\u201d<\/p>\n
The lessons of the 2013 Taper Tantrum prove strong and stark because it was so unexpected.<\/p>\n
According to Mr. Bellows, \u201cIn May 2013, then-Chairman Ben Bernanke said that the Fed could \u2018step
\ndown\u2019 the pace of asset purchases \u2018in the next few meetings.\u2019 There was no hint or suggestion in his
\ncomments that the Fed was also considering changes to the interest rate policy.\u201d<\/p>\n
\u201cIn fact, at the beginning of the same testimony, Bernanke emphasized that the Fed\u2019s forward guidance in
\nregard to interest rates \u2018underscore[d] the Committee\u2019s intention to maintain highly accommodative
\nmonetary policy as long as needed.\u2019\u201d<\/p>\n
\u201cYet, market participants struggled to make the distinction between changes in asset purchases and the
\nbroader accommodative stance. In the immediate aftermath of Bernanke\u2019s comments, the market
\nrepriced its expectation for the future path of short-term interest rates from one hike to four full hikes by
\nmid-2015. And this repricing was in spite of the fact that Fed officials were pushing back very hard and
\nreasserting the forward guidance at every opportunity.\u201d<\/p>\n
A common observation about the 2013 taper tantrum is that bonds and risk assets experienced a period
\nof negative returns, thereby upending the negative correlation between the two that is the foundation of
\nmany portfolios. This was true, but only for a very limited time.<\/p>\n
\u201cWhen assessed in the proper perspective, such a combination of price moves is neither puzzling nor
\nalarming,\u201d Mr. Bellows concludes.<\/p>\n
\u201cNow in 2017, central bank balance sheets are again top-of-mind for bond investors,\u201d he writes. The Fed
\nplans to shrink its balance sheet, slowly, gradually. The European Central Bank (ECB) is a few years
\nbehind but nonetheless has signaled a desire to move in the same direction.<\/p>\n
\u201cLarge central bank balance sheets have been a prominent feature of the post-crisis landscape, and it\u2019s
\nunderstandable that bond investors are watching these developments warily,\u201d Mr. Bellows writes. \u201cA few
\nhave even raised the concern that apparently small changes in balance sheet policy can have an
\noutsized impact on markets, as was the case in 2013.\u201d<\/p>\n
\u201cGiven this recent experience, some wariness about Fed moves \u2013 and the market\u2019s potential reaction \u2013 is
\nunderstandable.\u201d<\/p>\n
\u201cBut, is the taper tantrum really all that relevant for understanding the current landscape?\u201d<\/p>\n
Mr. Bellows believes its lessons remain important and relevant for bond investors.<\/p>\n
\u201cEncouragingly, this time around markets don\u2019t appear to be making the same mistake,\u201d he observes. \u201cIn
\nthe U.S. the market pricing of the path of short-term interest rates has actually moved lower this year,
\neven as the change to reinvestment policy has moved closer. And in Europe recent communications
\nabout a potential taper of asset purchases has had limited impact, if any, on the pricing of the short-term
\nrate path.\u201d<\/p>\n
\u201cThis is a key difference from 2013; this time around, central banks have been more successful in
\nmaintaining expectations that broad accommodation will remain in place \u2013 and should that hold, it will be
\nan important departure from the taper tantrum.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"
Short-Term Mispricing of Fed\u2019s Intentions Unlikely to Be As
\nSerious, This Time, Western Asset Predicts<\/p>\n","protected":false},"author":20,"featured_media":65104,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[1480],"tags":[1809,1655,2073,1943,1651,2087,2068,2054],"_links":{"self":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts\/65106"}],"collection":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/users\/20"}],"replies":[{"embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/comments?post=65106"}],"version-history":[{"count":0,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts\/65106\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/media\/65104"}],"wp:attachment":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/media?parent=65106"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/categories?post=65106"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/tags?post=65106"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}