Could We See a 'Triple Taper Tantrum'?

The 'taper talk' began in 2013 when worries arose that the US Federal Reserve would implement a tapered end to the purchase of bonds, a key practise within the policy of quantitative easing. Since then the Federal Reserve and other central banks have tried to avoid giving cause for the markets to react sharply. 

Instead there will likely be a gradual withdrawal from accommodative monetary policy. Most investors and central banks are hoping that clear, considered communication and a steady exit will avoid igniting another taper tantrum, which could undermine the financial markets' stability. 

However if the central banks do not have a solid contingency plan in place, the emergence of a 'triple taper tantrum' remains a possibility, undermining plans for a smooth exit from monetary accommodation. A rise in US interest rates, combined with the levelling off of growth in Japan and the Eurozone may be enough the heighten the danger of a triple taper tantrum.   

US data has not been robust, but it is getting better. On top of that, the second half of 2014 saw the European Central Bank (ECB) and Bank of Japan (BoJ) implement more monetary easing than expected in order to stabilise growth in the Eurozone and Japan. If the US does see a growth improvement and the Eurozone and Japan level out as a result of the measures taken, then the ECB and BoJ will not be likely to continue easing, while the Federal Reserve will probably begin to withdraw from monetary accommodation. Lastly, six months after its first policy rate rise, the Fed is anticipated to begin tapering its purchase of bonds, with the ECB and BoJ beginning to taper their purchases in the second half of 2016. 

Recent bond markets activity sheds light on why these scenarios may all lead to another tantrum. A recent rise in German bund yields occurred for reasons that were limited to Europe, and yet US Treasury yields also went up. The principles are there - global and US yields are pushed down by weak growth, disinflation and monetary easing in the Eurozone and Japan. Should growth in the Eurozone and Japan stabilise, then global yields can grow. 

This is a fundamental principle which, if the G3 economies continue as predicted, will see the central banks beginning to bring to an end monetary accommodation. However, should this be the case then the central banks need to think about they intend to bring this to a head without causing a repeat of the backlash they experienced in 2013.