The swift rise of borrowing costs on global bond markets over the last month could completely alter the outlook for financial markets, according to the central bank for the world’s central banks, the Bank for International Settlements.
In its latest quarterly report, the Swiss-based BIS also noted how wild retail trading-driven swings in stocks such as GameStop recently had helped whip up volatility.
The big shift however has been in the U.S. Treasury markets that tend to propel global borrowing costs on the sense that unprecedented stimulus will ignite inflation if COVID-19 vaccines allow economies to fully reopen this year.
Benchmark 10-year U.S. yields climbed above 1.6% last week, extending this year’s near 70 basis-point jump that has jacked up sovereign borrowing costs in Europe, Japan and elsewhere.
“The recent market jitters confirm that the back-up in bond yields and reflation trade are casting the financial market outlook in a completely new light,” said Claudio Borio, Head of the BIS’ Monetary and Economic Department.
“People just saw low rates for as far as the eye could see, whereas now they have started having doubts about how long these conditions would last.”
Economists have drawn 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 buoying markets.
Borio said the key to whether markets would have another lengthy tantrum was firstly dependent on whether world growth did accelerate quickly, and then also what the major central banks did in response to rising bond yields.
Current Fed Chair Jerome Powell gave assurances last week the bank was not about to dial down stimulus. ECB President Christine Lagarde has delivered a similar messages, but the United States has just agreed a new $1.9 trillion stimulus package.
Central banks “will have to work out what the implications of that (rising bond yields) for their objectives and respond accordingly,” Borio said, referring to mandates to curb inflation and keep financial markets from running out of control.
On the wild stock market moves this year, he said it was typical of retail investors getting involved during periods of euphoria.
“Whenever a taxi driver starts talking about what is happening in the stock markets it means something significant is going on,” Borio said.