By Jamie McGeever
LONDON (Reuters) – Investors spooked by the “taper tantrum” of 2013, when global markets took fright at the U.S. Federal Reserve’s first hint that it might taper its monetary expansion policy, take note: 2016 could be the year of the “triple taper tantrum”.
That’s the prediction of analysts at Morgan Stanley, who argue that the Fed, European Central Bank and Bank of Japan might all taper their super-loose monetary policies next year if growth and inflation across the three regions pick up enough.
The world’s three biggest central banks are at different stages of post-crisis management, so it’s a bold call. But it shows just how much markets have turned since the start of the year, when deflation was their worst fear.
“What is unknown is whether the economic situation will pan out as we see it,” said Manoj Pradhan, global economist at Morgan Stanley in London and co-author of the report. “We’ve had a few surprises recently, but the trajectory of monetary policy and growth is leading in that direction.”
The Fed has stopped its bond-buying program and its next move will almost certainly be a rate increase. The ECB has just begun a 1 trillion-euro quantitative easing program, which is set to run to September 2016. The BOJ’s QE program has paused but could resume at any stage.
If growth and inflation pick up in the euro zone and Japan, however, the ECB and BOJ will not need to provide further monetary stimulus.
Pradhan says the “triple taper tantrum” is likely to pan out as follows: The Fed divests its mortgage-backed securities portfolio in the first half of 2016 and both the ECB and BOJ run down their QE programs in the second half of 2016.
“None of these are yet on investor screens in a manner that affects their investment decisions, if our conversations are anything to go by,” Pradhan said.
In late May 2013, then-Fed chair Ben Bernanke dropped the strongest hint to date that the Fed would begin winding down its bond purchases. The yield on the 10-year Treasury note started rising from around 1.4 percent.
Bernanke appeared to back off from those comments a month later, sparking more market volatility, particularly Treasuries. The 10-year yield rose to 1.80 percent, fell, then climbed back above 2 percent that September.
That pales against the gyrations across all bond markets this week. Suddenly spooked by near-zero or even negative yields and a 50 percent rise in oil prices since January, investors have dumped German bonds in a manner not seen for decades.
The yield rose to a high of just under 80 basis points on Thursday from only five basis points in mid-April. Bund volatility soared to its highest since German reunification and bond prices were on course for the biggest fall since then.
The 10-year Treasury yield hit a five-month high above 2.30 percent, marking a rise of 50 basis points in only a month.
(Reporting by Jamie McGeever)