jueves, 6 de junio de 2013

jueves, junio 06, 2013

Markets Insight

 
June 4, 2013 2:11 pm
 
Markets Insight: Bond market jitters strengthen case for the bears
 
When talk of ‘tapering’ has such an impact, good economic news is bad news
 

Can you hear the bears growling? When bonds and equities were rallying globally until recently, the bear argument was that central banks and regulators had created such worrying vulnerabilities in the financial system that a plunge back to earth was only a matter of time. That tipping point looks closer than we thought a month ago.

Hints by Ben Bernanke, US Federal Reserve chairman, about a possibletapering” of the Federal Reserve’s quantitative easing programme two weeks ago not only drove up US bond yields, which move inversely with prices, and caused significant losses for bond investors; they created upsets globally.

Depending on your choice of measure, volatility in US Treasuries has jumped to levels not seen for a year and has also spiked for German Bunds. In Japan, where the central bank has struggled to control yields, volatility is back at levels last seen in 2008 and share prices are yo-yoing.

Such instability is a concern because low and stable core bond yields were the basis of the “carry trades” – borrowing at low interest rates to pile into higher yielding assets – that spurred stock and bond market advances.

What matters now is whether the pattern morphs into a disruptive sell-off – or the recalibration needed to prevent the bear scenario becoming reality.

The bull case for not worrying yet is that the Fed will act to prevent disorderly market shifts, wary of the possible impact on a still-nascent US economic recovery. Also arguing against this being a turning point is that exceptional central bank support for economies will be in place for a lot longer. The Bank of Japan has only just launched its aggressive bond buying plans; the European Central Bank could yet embark on asset purchases or fresh, large-scale liquidity injections.

But pessimists argue that if the mere talk about a “tapering” can cause such trouble, the probability of bigger accidents in coming months is substantial. In a topsy-turvy world in which good economic news is bad news – because it brings forward the day when QE stopsstrong non-farm US payroll data on Friday could see further disruptive bond selling.

Jaime Caruana, general manager of the Bank for International Settlements, on Tuesday highlighted the extraordinary challenge facing central bankers in a speech in Korea. Monetary authorities not only had to manage expectations about short-term interest rates, he argued. They also faced the “unfamiliar” (note the central banker’s understatement) challenge of managing longer-term interest rates, driven down by asset-purchase programmes to a point where investors pay a penalty for holding on to fixed-rate bonds.

“The very success of pushing the term premium down into negative territory has created the risks of a sudden rise, even if central banks succeed in communicating their intended paths for short-term policy rates,” Mr Caruana warned.

What is striking about the past few weeks is how global bond markets have moved in sync, despite differences in economic fundamentals. Measuring correlations is hard. But Ramin Nakisa and Stephane Deo, strategists at UBS, have broken up shifts in yield curves into different typesup and down moves in the whole curve, or a steepening or flattening, for instance. Their results suggest that correlations between US, UK, German and Australian yield curves have indeed strengthened significantly. In other words, we could be back on a scary rollercoaster of “risk-on, risk offmarket movements.

As the UBS researchers point out, there are historical precedents. In 1994 Germany’s Bundesbank cut official interest rates but the Fed had started a tightening cycle, and German yields went up, with the Bundesbank controlling only the very short end of the curve.

The truth is that we know relatively little about how central bank actions have affected global financial flows and priceslet alone, how the process will work in reverse. Speaking at the same conference as Mr Caruana in Korea, Benoît Cœuré, ECB executive board member, argued the debatefocuses too much ... on the negative externalities of domestic monetary policy decisions” and that better economic growth and deeper financial markets had also spurred investment in emerging market economies.

But even if the central banks’ impact on flows has been modest, quantitative easing has artificially lifted asset prices globally. Some protection against contagion effects may be offered by increased financialfragmentation” – the withdrawing by banks behind national borders.

That seems the case so far in eurozone periphery bond markets, from which nervous foreign investors have already fled. But fragmentation and tougher regulation may also have created bottle necks in the financial system, so it will be harder to find buyers in a downturn, and panic reactions could ensue. It’s the bears versus central bankers.

 
Copyright The Financial Times Limited 2013

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