EXPERTISE: NN Investment Partners

Taper Tremble

17 Juillet 2017 Par Valentijn van Nieuwenhuijzen
 (Photo: NN Investment Partners)

Markets remain in full swing. Bond markets are correcting as a "taper tantrum"-light is disrupting European government bond markets. Other market segments are obviously also impacted by these moves, but the degree of contagion into other asset classes or regions is clearly less dramatic than what was seen at the real taper tantrum of four years ago.

At that point in time, the former Fed chair Ben Bernanke had started to hint at a reduction in the Fed's pace of QE in May 2013 and triggered a sharp correction in almost all asset classes. Not only did bond yields rise at least twice as much as they have done in recent weeks, but also spread products suffered much more (EMD HC spreads, for example, jumped more than 70bps then, while they are only 10bps higher now). Moreover, global equities and real estate have lost some ground now as well (1% and 6% since their recent peaks in May/June, respectively), but these moves pale in comparison to the substantial sell-offs of more than 9% in equities and over 16% (!) in real estate the May/June-period in 2013.

Looking at global markets today it therefore seems more like a taper tremble than something worse that has rippled through markets recently. And to a large extent that is understandable since central bankers in the US, Europe and Japan have actually said very little news things. The markets have interpreted the recent statements as more commitment towards a gradual unwind of the unconventional QE policies that have been put in place in the post-Lehman era. The Fed has signalled it is willing to look through a soft patch in inflation dynamics, while also the ECB still seems to be steering towards (a further) tapering of QE from next year onwards despite falling probabilities of actually achieving its own inflation forecasts for 2018/19.

At the same time however has the market understood very well that a background of strong, but steady growth with continued lack of upward pressures on inflation and wages (look at last week’s payroll report in the US with strong jobs creation, but weak hourly earnings growth!) does not suggest that actual rate hikes by the Fed or the ECB are becoming more likely.

So, those pockets of the market most sensitive to a direct influence of QE, like German Bunds (leading to a technical scarcity) and peripheral bonds, have seen a serious correction. Other assets that are more influenced by rate hike expectations (US treasuries) or changing prospects for global growth, earnings and defaults (equities, credits, HY/EMD, etc.) have held up much better, as the outlook for those "fundamentals" has not materially changed.

What has changed a bit more is the behavioural side of the equation across asset classes. Trends in prices and flows have rolled over for some risky asset classes and big data analytics of investor sentiment are also turning a bit more cautious. Finally, positioning metrics for especially German government bonds have also normalised from being over-owned in recent weeks.

All in all, these behavioural dynamics have triggered us to scale back a bit on the aggressiveness of our allocation tilts, but have not altered the direction of our thinking.

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