We’ve seen this movie before.
JPMorgan Chase & Co. analysts led by Jay Barry point out that the latest sell-offs in government bonds and the rising yields they've produced resemble the 'taper tantrum' that engulfed markets back in 2013 as investors fretted about the potential for the Federal Reserve to reduce the pace of its asset purchases.
Yields on sovereign debt have jumped in recent days thanks in part to concerns over the ability or willingness of the European Central Bank and the Bank of Japan to continue their unconventional monetary policies, JPMorgan argues. But if those concerns were the spark that lit the fire, investors' collective positioning was the gasoline that fanned the subsequent flames.
"At least a portion of the recent rise in Treasury yields has been driven by shifting perceptions of monetary policy at other developed market central banks," the JPMorgan analysts said. "Coupled with still-long position technicals and rich valuations, the setup is somewhat similar to the preconditions before the taper tantrum in 2013 and the euro tantrum in 2015."
A JPMorgan survey of its clients showed investors were unusually long sovereign debt in the run-up to the recent sell-off. Portfolios were nearly two standard deviations longer relative to their medium-term average, while the yield on benchmark 10-year U.S. Treasuries traded richer relative to its fair value than they had been at any point in more than four years.
All of which sets the scene for a potential move higher as investors focus on upcoming central bank gatherings including the Fed's and the BOJ's two-day policy meetings next week.
Instead of buying more Japanese government debt (JGBs), the BOJ may opt to turn its purchasing to corporate bonds and local government bonds as it attempts to avoid further harming banks, pension funds, and insurers, JPMorgan economists have argued. Less JGB-buying would likely steepen the so-called yield curve and could cause a further sell-off in government debt.
"Our Japanese economists continue to expect a 20 basis point cut in the policy rate, but they now think the BOJ will attempt to mitigate the cost of [its negative interest rate policy] in part by trying to steepen the yield curve," the analysts conclude. "Any attempt by the BOJ to steepen the yield curve next week could potentially lead Treasury yields to rise further from current levels."