From Taper Tantrum to Bund Bedlam
IMF Blog, July 13, 2015
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- From Taper Tantrum to Bund Bedlam
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- Authors: Yingyuan Chen, David Jones, Sanjay Hazarika
- Published: July 13, 2015
Overview
- Global financial markets traditionally take their cue from the United States, but in the past year German government bonds (Bunds) have been driving prices in global bond markets rather than U.S. Treasuries.
- This role reversal adds complexity to investor calculations ahead of expected Fed interest rate hikes later in 2015.
- Developments in Greece have led to synchronized rises and falls in Bund and Treasury yields.
Key findings and evidence
- The IMF's Global Financial Stability Report highlighted that monetary developments in the euro area have had a particularly strong effect on long-term U.S. interest rates.
- At the Jackson Hole conference of central bankers in August 2014, Mario Draghi signaled potential additional unconventional monetary policies; subsequently the ECB introduced negative deposit rates and quantitative easing through large-scale asset purchases—this marked a turning point in the Bund–Treasury relationship.
- Granger causality analysis results:
- Before August 2014, changes in the 10-year Treasury rate were more likely to precede (Granger cause) changes in the 10-year Bund rate.
- After August 2014, the reverse was true—changes in Bund yields were more likely to precede (Granger cause) changes in Treasury yields.
- Specific observed movements:
- As 10-year Bund yields declined 50 basis points by the end of 2014, 10-year U.S. Treasury yields declined by a similar amount.
- On May 7, 2015, 10-year Bund yields jumped from 0.59% to 0.78% (the highest in five months) before ending the daily session essentially unchanged; the Bund change triggered an equivalent response among Treasuries.
- In the first days of June, a spike in 10-year Bund yields from 50 basis points to 1% pulled Treasury yields from 2.12% to nearly 2.50%.
- Between April and June, “Bund Bedlam” helped drive 10-year Treasury rates over 60 bps higher.
Market expectations and tensions with Fed communications
- Analysis from October showed a dissonance between market expectations on the timing and pacing of rate hikes and the Fed’s own projections:
- The market expects the pace to be relatively moderate and for the terminal Fed funds rate to be relatively low.
- This largely remained true even after the April–June rise in 10-year Treasury rates driven by Bund moves.
- The U.S. Treasury market may be set up for a volatile period when the Fed’s intent to raise short-term interest rates confronts pressure on U.S. long-term rates from Europe.
- Despite headwinds—such as a slow first quarter, the stronger dollar, and uncertainty arising from Greece—Fed communications indicate the United States is making progress towards conditions that justify raising interest rates.
Implications for investors and policymakers
- The shift in lead-lag dynamics from Treasuries to Bunds implies European monetary policy and events (e.g., ECB actions, Greece developments) can materially influence U.S. long-term rates.
- Investors should prepare for heightened volatility in U.S. long-term yields as Fed tightening expectations collide with European-driven pressures.
- Policymakers should monitor cross-market spillovers, since unconventional monetary policies in the euro area can transmit unexpectedly to U.S. interest rates and global financial conditions.
From Taper Tantrum to Bund Bedlam — Yingyuan Chen, David Jones, Sanjay Hazarika, July 13, 2015
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