Analysis: Big moves and liquidity woes in a U.S. bond 'tantrum without the taper'

NEW YORK (Reuters) – A sharp jump in U.S. Treasury yields this week has bond managers talking about a “tantrum”, worrying about extreme moves and pockets of poor liquidity in the $20 trillion market.

FILE PHOTO: A picture illustration shows U.S. 100 dollar bank notes taken in Tokyo August 2, 2011. REUTERS/Yuriko Nakao

The selloff in U.S. Treasury bonds, which pushes prices down and yields up, has gathered steam in recent weeks due to rising expectations for economic growth – and fears inflation could spike if the economy overheats.

Bond market investors and analysts drew parallels to the 2013 taper tantrum, when bond yields rose dramatically after then-Fed Chair Ben Bernanke told lawmakers the Fed could take a step down in its pace of purchases of assets that had been propping markets.

The benchmark 10-year yield on Thursday rose to 1.614%, its highest since the start of the pandemic. The real interest rate on the 10-year note – the bond yield minus inflation – hit a nine-month high.

“We’re definitely breaking apart here,” said Greg Peters, senior portfolio manager at PGIM Fixed Income. “Big move, bad liquidity, feels like March 2020.”

The Treasury market faced a liquidity crunch as the coronavirus was taking hold in the United States, until the Federal Reserve again intervened to backstop the market.

The fear now among investors is that the Fed will raise rates or taper asset purchases sooner than expected, despite Chair Jerome Powell’s assurances this week the Fed would not.

Thursday’s selloff was accelerated by historically weak demand at auction for $62 billion of seven-year notes.

The poor auction “was indicative of primary market dysfunction,” wrote analysts at TD Securities. Secondary markets were also showing signs of stress, they said, with bid-ask spreads widening.

The bid-ask spread on the five-year Treasury note – a measure of liquidity which shows the difference between how much a seller offers and a buyer bids – on Thursday reached its widest since January 2009.

“There is no liquidity,” said Andrew Brenner, head of international fixed income at NatAlliance Securities.

Gregory Whiteley a portfolio manager at DoubleLine Capital said the selloff was “beginning to look like a taper tantrum, where there is some panic shedding of market exposure.”

This yield rise was notable for its speed, gaining more than 30 basis points in just over two weeks.

“Tantrum without the taper,” wrote TD analysts in a research note that said recent price action was “eerily reminiscent of the 2013 taper tantrum.” But unlike then “there has been no mention of an imminent taper by Fed officials.”

Hopes that the vaccination rollout and fiscal stimulus would further bolster the economy “created taper concerns and the Fed has thus far not been willing to soothe markets” said TD.

Analysts at Citi had the same thought, penning a paper: “Tantrum Without Any Taper.” They noted a primary reason for the sharp pace of the selloff may be convexity hedging, in which investors holding mortgage-backed securities reduce the risks on the loans they manage during rising rate environments, by selling Treasuries.


Still, many bond managers argued the move was likely temporary.

“All tantrums come to an end after inflicting pain, and we seem to be reaching a pain point,” wrote analysts at Societe Generale.

DoubleLine’s Whiteley said “part of what is feeding this selloff is the Fed telling us, in so many words, that they are not going to step in and stop this rise in rates.”

Nevertheless, he’s convinced the Fed are at some point “going to say that this rise in rates is becoming a headwind to the recovery… and they will step in.”

“It seems overdone to me,” Whiteley said.

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