Morning Commentary: Eye-Catching but Not Unprecedented
A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.
Eye-Catching but Not Unprecedented
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Andrew Kositkun Senior FX Advisor
The nominal U.S. 10-year yield has risen over 100 basis points (bps) from its lows in August of last year. While the recent sell-off in the bond market has caught many people’s attention, it isn’t an unprecedented move. Since 1985, there has been six other times the 10-year yield has risen more than 100 bps over an eight-month period. Here we take a look at each of these events.
The taper tantrum (December 2013, 114 bps): The tantrum was triggered by the Federal Reserve signaling an end to quantitative easing (QE). Despite concerns over a slump in the economy and equities, both recovered quickly and moved to new highs.
The post-recession rebound (August 2009, 117 bps): Yields rose as markets started to price in an economic recovery. A 10-year economic expansion and equity bull market subsequently took place.
The dot-com bubble (August 1999, 129 bps): A surge in tech stocks pulled other markets higher. Fed rate hikes and a popping of the bubble resulted in a mild recession.
The inflation scare (September 1996, 118 bps): With unemployment dropping below estimates of the nonaccelerating inflation rate of unemployment and core inflation inching up, the Fed started to hike and bond yields jumped. Improving productivity from the “new paradigm” economy capped cost pressures, the Fed halted its hiking cycle with just one hike, and the economy continued to expand.
The Fed overshoot (May 1994, 182 bps): After an initial weak economic recovery, the Fed started a hiking cycle. However, the economy didn’t slow down, leading markets to price in even more hikes. The Fed ultimately pulled back in 1995 after growth finally slowed.
The 1987 stock market crash (September 1987, 234 bps): Many books have been written discussing how to partition blame, but surging bond yields certainly played a key role. In the seven months through September, 10-year yields rose over 240 bps. This reflected inflation concerns and the Fed hiking cycle designed to arrest inflation and prevent a weak dollar.
Given the history of rising yields, the current state of the bond market isn’t all too troubling. The economic recovery remains in the early stages, troublesome inflation doesn’t appear to be an issue this year, and the Fed is nowhere close to hiking. At its last meeting, the Fed said it would be on hold through 2023 despite three years of projected inflation at or above target and expected unemployment of 3.5%. By any measure, this is a remarkably dovish stance.
Thankfully, a repeat of the 1987 bond-induced stock market crash appears to be a distant possibility. While equity valuations are high, the bond market is in a very different place than in 1987. Yes, bond yields have risen but to a much smaller magnitude, and inflation has yet to emerge as an issue, with Fed hiking nowhere in sight. So while a further move higher in yields is quite likely, markets should be able to handle it.
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