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What’s To Come: Just Rising Yields Or Taper Tantrum?

by Tavaga Invest

What is Taper Tantrum?

Post the financial crisis of 2008, US Fed announced a bond-buying program among the many measures to boost the economy. By doing so, Fed was feeding money into the economy and hence aiding demand and liquidity. Even though this is a good short-term fix but in the long-run could create fears of hyperinflation due to a fall in the value of the currency. Because of the bond purchase program, the size of the Fed’s Balance Sheet literally tripled as it had already bought ~$2 Tn worth of bonds and assets by 2013.

Fearing this, Fed announced that it would at some future date, taper (reduce or stop) the bond purchases in order to reduce the risks by limiting what it was constantly feeding into the system. This announcement had a severe impact on the investor sentiment and triggered massive selloffs and the entire episode was later termed “taper tantrum”. The Taper Tantrum of 2013 hurt the Asian markets immensely due to massive capital outflows, which ultimately led to rate hikes in the Asian economies to protect themselves.

What is happening right now?

Central banks, across the globe, had ensured that bond yields fall as a fallout of the pandemic caused due to Covid-19, and they were successful in managing the yields by pumping money into the system. However, optimistic GDP data and inflationary expectations had spiked the yields and brought rates for US 10 Y Treasury notes from nearly 1% at the beginning of 2021 to ~1.7%. Further, the $1.9 Tn stimulus package caused upward revisions in median inflation and growth projections in the US this week.

U.S. 10 Y Treasury Note

The rising yield scenario had created a selloff in the global equity markets. SENSEX, which had created new highs near 52,000 in February; fell sharply to ~49,000 from ~51,000. Even though it showed signs of recovery earlier in March attaining levels above 51,000, it has now seemed to have given up as we can see below:

Sensex Price Movements

The sentiment has also worsened because of the recent spike in COVID-19 cases in India. While new COVID cases were close to 10,000 levels when March began, they have tripled by now.

India COVID Daily Cases

All the broad market indexes fell by more than 1% yesterday. Within the sectors, IT and pharma were the biggest losers with NIFTY IT falling by more than 3% and NIFTY Pharma by ~2.3%.

Index  % Change
Broad Market Indices :
NIFTY SMALLCAP 250                         -1.43
NIFTY MIDCAP 100                         -1.37
NIFTY NEXT 50                         -1.20
NIFTY 50                         -1.11
Sectoral Indices :
NIFTY IT                         -3.09
NIFTY PHARMA                         -2.32
NIFTY BANK                         -1.09
NIFTY AUTO                         -0.15
NIFTY METAL                           0.04
NIFTY FMCG                           0.08
  Source: Tavaga Research, Data for 18th March 2021

How should the investors react?

Many investors tend to do panic selling in such situations; however, we maintain our view that this is not a time to exit. Rather we should systematically keep investing in such scenarios. COVID vaccines have been successfully rolling out in the country as well as globally and are expected to bring the pandemic under control soon. We believe that the rising yields are set to take a halt soon too ,as Jerome Powell, the Fed chairman, has signalled near zero interest rates by 2023 with enough liquidity in the market.

Investors can consider the following:

As there are large corrections in broader indices, continue investing in ETFs via the staggered lumpsum and SIP mode.

Defensive stocks keeps the portfolio intact by not reacting aggressively to sell-offs, therefore buying them on a 5-10% correction must be considered.

Gold has historically helped in diversifying the equity exposure and provides some cushion in uncertainties. Moreover, getting an exposure to top 100 tech stocks (Tesla, Netflix, Amazon, Apple, Facebook, Alphabet, etc.) of US via the Nasdaq 100 ETF, also forms an important component of diversification.

As today’s (March,19 2021) trades closed, there was sudden buying witnessed across indices as traders and investors reacted positively to a sharp dip in markets. Large-cap growth stocks such as Reliance Industries, PI Industries, Hindustan Unilever, Divis Labs bounced back from their weekly lows.

Team Tavaga will be happy to review your portfolio and be your financial doctor in order to create wealth in the long-term.

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