We assess the mood in bond markets as central banks once again start to focus on tapering quantitative-easing programmes.
- Central banks are once again talking about reducing the rate at which they will continue to buy bonds through their various quantitative easing (QE) programmes.
- 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) programmes.
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 programmes.
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 programmes.
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 summarised 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.
This is a financial promotion. These opinions should not be construed as investment or other advice and are subject to change. This material is for information purposes only. This material is for professional investors only. Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell investments in those securities, countries or sectors. Please note that holdings and positioning are subject to change without notice. Newton manages a variety of investment strategies. Whether and how ESG considerations are assessed or integrated into Newton’s strategies depends on the asset classes and/or the particular strategy involved, as well as the research and investment approach of each Newton firm. ESG may not be considered for each individual investment and, where ESG is considered, other attributes of an investment may outweigh ESG considerations when making investment decisions. [General regulatory disclosures] Issued by Newton Investment Management Limited, The Bank of New York Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Registered in England No. 01371973. Newton Investment Management Limited is authorised and regulated by the Financial Conduct Authority, 12 Endeavour Square, London, E20 1JN. Newton Investment Management Limited 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. ‘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’).
This material is for Australian wholesale clients only and is not intended for distribution to, nor should it be relied upon by, retail clients. This information has not been prepared to take into account the investment objectives, financial objectives or particular needs of any particular person. Before making an investment decision you should carefully consider, with or without the assistance of a financial adviser, whether such an investment strategy is appropriate in light of your particular investment needs, objectives and financial circumstances.
Newton Investment Management Limited is exempt from the requirement to hold an Australian financial services licence in respect of the financial services it provides to wholesale clients in Australia and is authorised and regulated by the Financial Conduct Authority of the UK under UK laws, which differ from Australian laws.
Newton Investment Management Limited (Newton) is authorised and regulated in the UK by the Financial Conduct Authority (FCA), 12 Endeavour Square, London, E20 1JN. Newton is providing financial services to wholesale clients in Australia in reliance on ASIC Corporations (Repeal and Transitional) Instrument 2016/396, a copy of which is on the website of the Australian Securities and Investments Commission, www.asic.gov.au. The instrument exempts entities that are authorised and regulated in the UK by the FCA, such as Newton, from the need to hold an Australian financial services license under the Corporations Act 2001 for certain financial services provided to Australian wholesale clients on certain conditions. Financial services provided by Newton are regulated by the FCA under the laws and regulatory requirements of the United Kingdom, which are different to the laws applying in Australia.