The ‘look at me’ moment last week in the US bond market was reminiscent of the very start of the 2013 taper-tantrum.
Here is the chart of the US-10 year and the forward inflation expectations show just how fast the bond market moved on the mere speculation the US Federal Reverse may begin reducing its current programs.
A 21-basis point (bps) move certainly got the board to sit up and take notice. So much so that they were almost stumbling over each over to calm the market down.
The 2 quotes that mattered were from Richard Clarida and Lael Brainard.
“No rate hike until we get to 2% inflation for a year.” …” I don’t expect any change to policy near term, the earliest change would be possibly be 2022” – Clarida
“Given my baseline outlook, I expect that the current pace of purchases will remain appropriate for quite some time” – Brainard
Not surprised to see the Board trying to talk the market back from the proverbial edge, they will have a long memory of the Freudian (market) slip Ben Bernanke pulled in 2013 disclosing that the Board was ‘thinking’ about how and when to withdraw its support after the Global Financial Crisis (GFC).
The reaction was swift, volatile and savage. Interest-sensitive assets in equities and property were shed and FX was sent into a tailspin as the risk-free rate drove flows State-side. All because the Board was thinking about tapering.
What was interesting about last week is the reactions in FX were similar to 2013.
Here is the AUD/USD and the US 10-year bond yield (inverted).
You can see the recovery in the AUD as the Board talked down possible tapering and the US bond market calmed.
But last week’s look at me moment teach us is that any ‘expectation’ inflation is progressing ahead of schedule, or that the Board is ‘thinking’ about post-COVID policy scenarios, markets are going to react irrational and see flow running for the USD.