Primary market risk from taper tantrums

Published on 22 February 2021

Central banks are impacting primary and secondary market activity in their role as rate setters and bond buyers. The potential for a taper tantrum – in which yields surge as central banks reduce asset purchasing – is potentially a risk for investors over the next year and into 2022.

Shane Balkham, chief investment officers at Beaufort Investment explains when and how investors should prepare in consideration of new and existing bonds.

Dan Barnes Welcome to Primary Markets TV – your updates on newly issued securities in the equity and fixed income markets. I’m Dan Barnes. Today we’re going to be looking at the potential for a taper tantrum this year, and the impact that might have on bonds that are newly issued versus bonds are already held in people’s portfolios. Joining me is Shane Balkham, chief investment officer for Beaufort Investments. Shane. Welcome to the show.

Shane Balkham Thank you for having me, Dan.

Dan Barnes How might central bank activity change in 2021?

Shane Balkham Ironically, I don’t think they’ll change very much in 2021. I think we’ve sort of got the blueprints of what central banks want, and that was to make sure there was a lot of stimulus in the marketplace to avoid a repeat of the global financial crisis. I think we’ve got that now, there’s enough liquidity in the system. So now we’re in a sort of, almost in a holding pattern until we get the vaccine all the way through the globe. So I don’t think you’re going to see central banks wanting to rock the boat at this point. They don’t want to sort of give too many hints of what the future might hold. And I know we recently had some some concerns of a taper trantrum, because the market’s always looking ahead of, OK, everything’s fine now, but what about six months, 12 months down the line? I don’t think we have any rhetoric about easing quantitative easing or raising interest rates. I think that’s going to be a 2022, 2023 issue. But it’s something you need to start being aware of already, though.

Dan Barnes OK, so if we’re looking that far ahead, what are the implications, if there is a temper tantrum in 2022, what are the implications for newly issued bonds and then bonds people are already holding in their portfolios?

Shane Balkham For newly issued bonds, I think this is a great opportunity to get that debt issued as soon as possible. I think when we’ve got to the the light at the end of the tunnel and the world is vaccinated and we can ease lockdown, I think companies will be looking towards, okay, what’s the future going to hold for us? So if I was a company and I had debt to issue, I’d make sure I issued it before the summer. And with rates as low as possible, it’s an opportunity as well, probably to increase your debt profile as well, so to push that out as far as you can. For existing bonds that you might have in your portfolios, I think now’s the time to have a look and say, OK, what was my duration? How much coop am I receiving? What bonds are going to be more sensitive to an environment that’s going to be volatile in a position where we got raising interest rates rumors, if not actual interest rate rumors. So, it might be time now to cleanse your bond issuance as and when there’s still demand for it. So I think get out early and make sure you’ve got a portfolio position for for the next couple of years.

Dan Barnes When we talk about taper tantrum, this is something that we saw in the US at the end of quantitative easing. And to some extent there was discussion of this in Europe. Can you just sort of explain what it means?

Shane Balkham Yeah. So back in 2013, just coming out of the global financial crisis and all of this new central bank experimentation with quantitative easing, there was going to be a point, well, at some point we have to stop this. And there’s that great analogy of taking the punchbowl away from the party that was used then. And I think back in May 2013, it came as quite a surprise. So he had Ben Bernanke announced they were going to start easing off their purchasing of assets. And I think it came to a huge shock in the marketplace. And you saw a drop of around 10% and everyone was a little bit, ‘Oh my gosh, what does that mean?’

This time around, we’ve got a blueprint, and I think we’ve seen that with all the central bank actions we’ve had since March last year, so everything’s been done a lot quicker and a lot bigger. So this time around, I think the forward guidance will be ever so softly, softly. And Jerome Powell is already sort of pushed it to one side already saying, ‘no, no. No talk of quantitative easing this year.’ So, potentially early next year we might have talk about easing the asset purchase program. But for interest rate rises, I think that’s the long term down the line. If you look at the Fed stop plots, that’s not out till the end of 2023. I think Jerome Powell definitely wants to make sure unemployment comes down before he pulls any trigger. And, of course, they changed their inflation measure, and I think his legacy might be to actually leave when there’s some inflation in the marketplace. So it’s something to look at now, but I think it will be a lot more guided than it was previously.

Dan Barnes That’s great. Shane, thank you so much.

Shane Balkham Absolute pleasure. Thank you, Dan.