Central Banks Walk a Fine Line as Inflation Grows
Central Banks around the world have bought trillions of dollars in government and corporate bonds to keep borrowing costs down.
Investors could get spooked if central banks were to drop monetary support too quickly and unexpectedly, analysts are warning according to a report from S&P Market Intelligence.
“The ‘pact’ between investors and central banks is that they will maintain stimulus packages and bond markets will behave themselves. One wrong word from a central banker and it’s 2013 all over again,” Colin Finlayson, co-manager of Aegon Asset Management told S&P Market Intelligence in an email.
Currently central banks around the world appear to be in no rush to halt their quantitative easing programs.
But if investors lose faith in monetary policy, though, a repeat of the 2013 bond yield debacle will be more likely, analysts tell S&P.
In that year, then-Fed Chair Ben Bernanke Ben Bernanke rattled investors by indicating the Fed would reduce its monthly purchases of Treasuries, triggering a spike in borrowing costs.
As of now, central banks are looking for the right time to turn off the taps of monetary support as vaccines roll out and countries unlock.
During the pandemic, the US Federal Reserve, European Central Bank, Bank of Japan, Bank of England and others have bought trillions of dollars in government and corporate bonds — bloating their combined balance sheets to about $25 trillion — to keep borrowing costs down and limit the number of defaults and bankruptcies caused by Covid-19-related lockdowns.
Investors are also increasingly concerned that central banks are out of step with the reality of inflationary pressures stemming from growing demand, supply constraints and extensive government spending.
That concern bears watching, said Kambiz Kazemi, chief investment officer for Validus Risk Management.
“The worst-case scenario would be one in which the Fed continues sending an accommodative message despite a changing reality on the ground, only to end up changing its stance,” he told S&P Market Intelligence. “This, combined with poor communication, will create a sense of abruptness resulting in risk-off for assets and a move higher for rates.”
Looking ahead, Althea Spinozzi, fixed income strategist at Saxo Bank, said the longer central banks wait to taper, the bigger the chance for a taper tantrum.
The expert predicted yields worldwide can only move higher and the first mover among the central banks will drag the others.