Where next for the taper tantrum?

I have been musing on the likelihood of a new taper tantrum for months. I still think that the inflation pulse that underlies it is temporary. But how much and high long are open questions. To examine the question, Morgan Stanley provides some charts comparing this round with 2013:

Taper Tantrum Tracker

Across-asset comparison of recent moves with the ‘taper tantrum’ of 2013. Today versus May 2013 – tracking the progress: By popular demand, we compare changes and levels across key asset classes.

What’s similar and different? Pricing of the first rate hike, US 10yr real yields, the 5s30s curve and overall commodity prices are following May 2013 closely. The ERP fell in 2013, but has been stable today. Both credit and equity volatility are adjusting faster than they did in 2013.

Where are levels different? Relative to May 2013, the market is expecting a faster pace of rate hikes (after the first hike), the 5s30s curve is much flatter, US ERP is much lower, credit spreads are much lower and implied equity and FX volatility are much higher.

In short, the market is:

  • More bullish on short-term inflation than it was in 2013.
  • More dovish about long-term inflation than it was in 2013.
  • More bullish on commodities than 2013.
  • Less bullish DXY than 2013.
  • More bullish stocks than 2013.

This reaffirms my view that the tantrum has further to run given the unfolding circumstances are, in my view:

  • More DXY bullish than 2013 though that is mitigated by a higher level.
  • Less bullish for China and commodities than 2013.

I agree with the market that a boom and bust for inflation is the base case. So there is a buy point for duration and growth before too long in here as well, but not before some headier volatility.

David Llewellyn-Smith
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Comments

  1. While the CPI is fraudulent how/why would bond investors trust the stated value of the bonds. This selloff could continue long after transient CPI lift.

    • The Traveling Wilbur

      Yields could keep rising even if the CPI is accepted as credible provided that it continues to rise at even just the same percentage rate as the previous quarter/month quarter/month on quarter/month. Doesn’t have to keep rising, or stay over 3% forever.

      Kinda the problem really, as that’s just normal for inflation. So normal = horrible for stonks. Allegedley.

  2. This is not a taper tantrum. To call it one is ignorant and infantile.

    Inflation breakevens rose in H2 2020 to just above the US inflation target out the curve and now we are seeing real yields rise after being massively negative. BTW, real yields out to 4-5 years have actually fallen recently, as inflation breakevens rose and the Fed kept the short end anchored.

    This is the market pricing a recovery, it’s exactly what the Fed would like to see.

  3. “This is the market pricing a recovery,”

    Hahaha The market is an ass then. With hundreds of thousands of SMEs out of business the world over I doubt a recovery is anywhere in sight.

    BTW one adjective is often more effective that two – i.e ignorant or infantile 🙂

    https://www.youtube.com/watch?v=XAAdwhxzhE8