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Treasuries Face Risk of ‘Mini Taper Tantrum’ in 2021, MUFG Says

Benjamin Purvis
·2 mins read

(Bloomberg) -- The bond market is underestimating how strongly the U.S. economy will rebound, and that may lead to a “mini taper tantrum” next year, according to John Herrmann at MUFG Securities Americas.

The strategist sees the unemployment rate dropping far more quickly than most forecasters, including the Federal Reserve. That could lead to a shift in investor sentiment that will drive up bond yields, echoing in part the 2013 lurch higher that has since been labeled “the taper tantrum.”

The American economy has been battered by measures to curb the pandemic, and the jobless rate stands at 7.9%, more than double its February level. While the Fed has been providing support via near-zero interest rates and monthly bond purchases, Herrmann questions how sustainable this will be if the labor market rebounds as he expects.

“You may get a mini taper tantrum next summer because at some point people are going to start challenging the Fed and saying how are you going to maintain $120 billion of purchases per month,” Herrmann said in an MUFG podcast.

Pre-Pandemic Levels

While the consensus estimate of analysts surveyed by Bloomberg is for the jobless rate to fall to 7.6% this quarter, Herrmann forecasts 6.25% at year-end. And it will keep sinking from there in his view, to 4% or below by the end of 2021, “within striking range” of pre-pandemic levels.

He also estimates that the U.S. economy will contract just 2.4% in 2020, while noting that he sees even that as a “conservative estimate.”

The recovery, in his view, is unlikely to be as long and “arduous” as officials suggest and when the economy begins to reflect that some time between May and August, there could be a shakeup in the Treasury market.

Market sentiment at the moment reflects consensus views of the economic trajectory, according to Herrmann. He notes that despite a lot of buzz around the so-called curve-steepening trade -- a bet that longer-term Treasuries will underperform shorter-term obligations -- the forwards market is actually pricing in further flattening.

Pricing that shows the 30-year yield barely budging in the next couple of years is “way too complacent,” he said.

“At some point the bond vigilante is going to have to resurface,” he said, referring to a term for investors who protest monetary or fiscal policies that they consider inflationary by selling bonds. “We saw that in 2013.”

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