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26.08.2021
Taper Tantrum?
Bond yields have crept higher this week as we head into Chair Powell’s Jackson Hole speech. Does that indicate the return of the bond vigilantes & fears of a taper tantrum?

The chart below shows Qi’s measure of Central Bank Quantitiave Tightening expectations in z-score terms over the course of 2021.
Friday
Fed QT expectations is the red line. It clearly led the Q1 taper tantrum. Rate volatility spiked significantly in Feb / March &, on Qi, that was a 5 standard deviation move.

Since then we have seen a gradual drift lower &, the current snapshot suggests US interest rate volatility has reverted close to trend. Powell clearly has the capacity to surprise in today’s speech but, going into the event at least, there is no sign the bond vigilantes are particularly agitated.

An alternative interpretation would suggest the stage is set for the next exogenous shock that prompts a deviation from long term trend.

Unsurprisingly, the BoJ has followed its own path while the rate volatility market in Euros & Sterling suggest the ECB & BoE are largely derivatives of the Fed decision.

The inference from this picture confirms the current perception that the Fed will be first mover; the BoE not far behind, while rate vol markets think the ECB & BoJ are happy to maintain their uber accommodative stance for some time yet.
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