A little thunder from Down Under soothed global bond markets and cleared the way for a big day for U.S. stocks on Monday — but it is unlikely to be the last word in a debate over rising bond yields and what central banks should do about them.
Rising global bond yields gave stock-market investors a case of dyspepsia last week, aggravated by signs of central bank disarray over what, if anything, should be said or done. Leave it to Australia’s central bank to take action, underlining its commitment Monday to a policy known as yield-curve control by doubling their daily bond purchases to A$4 billion ($3.11 billion) from A$2 billion, immediately pulling down 10-year Australian yields. Yields and bond prices move in opposite directions.
That was also credited with helping to stem a rise in yields elsewhere, particularly the yield on the 10-year Treasury note TMUBMUSD10Y, 1.426% edged 1.6 basis points lower to 1.446% after a sharp move last week that saw the benchmark briefly spike to a more-than-one-year high at 1.60%.
The pullback in yields soothed stock-market traders, who pushed the Dow Jones Industrial Average DJIA, +1.95% up more than 700 points near its session high. The Dow ended the day with a gain of more than 600 points, or 1.9%, while the S&P 500 SPX, +2.38% advanced 2.4% and the Nasdaq Composite COMP, +3.01% gained 3%.
But now, said Alan Ruskin, the “key macro/market question of the day is: will the Fed ‘do an RBA’ or something similar?”
The easiest thing for the Fed to do would be to “serve notice that they are monitoring events in the bond market, and its spillover on to other asset markets
closely,” Ruskin said, in a Monday note. “Jawboning of this sort is cheap, not least since it does not upset any future policy options.”
There’s also a long list of reasons why the Fed shouldn’t go that route, he said, with the top one being that it is much easier for a central bank to get into intervention mode than to get out.
“Much like FX intervention, were they to take the step of further intervening directly, they will leave the market guessing whether they will or won’t in the future, (and) that will be destabilizing in its own right,” Ruskin wrote.
Besides, the Fed can still hope the pace of the yield move will slow as long as yields aren’t on the cust of new highs where they can trigger what’s known as “convexity bond selling,” he said. And despite last week’s selloff, the spillover to other risky assets, particularly equity and credit markets, has been relatively modest, “especially in the context of their recent ebullience,” Ruskin noted.
Analysts noted that Australia has felt the brunt of the rise in global yields.
Meanwhile, European Central Bank officials have raised alarm bells over rising yields, but also saw the pace of its bond purchases slow last week, which analysts warned sent a mixed message.
Fed Chairman Jerome Powell last week played down the rise in Treasury yields as signs of growing faith in an economic recovery, while pushing back on the notion that rising inflation concerns could prompt the central bank to begin pulling back on monetary stimulus earlier than anticipated.
Innes McFee, chief global economist at Oxford Economics, said that the lack of a coherent message from the world’s major central banks in the face of rising yields has helped transform a “perfectly normal selloff in the long end of the yield curve driven by higher inflation expectations” into “into more general worries that we are on the verge of a new policy paradigm.”
The new paradigm is one in which fiscal policy drives growth, while monetary policy takes a back seat, allowing yields to rise significantly, McFee said in a Monday note.
It is a condition that he argued could, and probably would, be remedied by central bankers in coming days.
“The current market selloff should be contained with a strong verbal reiteration
of existing forward guidance from central bankers in the coming days,” he said. “If policy makers fluff their lines, then we wouldn’t rule out another round of asset
purchases to avoid a sustained tightening in financial conditions.”
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