“Market confidence in the strength of the US recovery is so strong and widespread that the tapering boat has sailed already,” they said, predicting “tapering” would happen by the end of 2021, rather than 2022 as predicted by Fed surveys.
Money markets show investors expect a Fed rate rise next year; some bet on an even earlier move. Euro-dollar futures suggest a roughly 64% chance of a 25-bp rate hike by the end of 2022. A week ago it was seen at 52%.
“Markets heard central bankers saying ‘Stop it, markets, you are going too far,’ but they are worrying central banks might change their mind as new data emerges,” said April LaRusse, head of fixed-income investment specialists at Insight Investment.
If travel, dining out and shopping fully resume in coming months, it could unleash trillions of dollars in pent-up savings worldwide. Just in the United States, personal savings totaled $2.38 trillion at a seasonally adjusted annual rate in December, higher than at any time before the pandemic.
The steeper yield curve is “a reflection of the fact that we’re seeing these green shoots in terms of economic stats, comfort that the vaccine is kicking in,” said Anders Persson, chief investment officer of global fixed income at Nuveen.
Some investors are betting that the rise in yields will prompt the Fed to act, but not by tightening policy.
“I do feel that some form of yield curve control is on the cards. Reason being, inflation will likely not be sustained. We will see a pop as we emerge from the COVID crisis but it will not be permanent,” said Nick Maroutsos, head of global bonds at Janus Henderson.
The Fed discussed the possibility of reweighting its bond purchases toward the long end of the curve at its November and December meetings. While the bank chose not to act then, yield curve control, which was used in the wake of the 20072009 financial crisis, remains an option.
The picture is similar elsewhere.
In New Zealand, warnings of downside risks to the economy by Reserve Bank of New Zealand Governor Adrian Orr contrasted with buoyant data.
Bond yields shrugged off his comments to hit 11-month highs, while overnight index swaps (OIS) began pricing in the possibility of an end-2021 rate hike.
There is of course the possibility that the pledges to keep policy ultra-loose in the face of recovering growth only fan inflation expectations further. So could markets force central banks to act rather than just jawboning? —