Taper Tantrum Haunts World's Better Economy


Since Covid-19 has been spreading worldwide for one year, the US market faces bigger worries. Now inflation has converted to the most considerable outlier risk that could cause the most havoc. As government bond yields have spiked to pre-pandemic levels, inflation has become a significant factor in the market. It manifests by the "breakeven" rate between 5-year Treasury yields, and inflation-indexed bonds have surged to their highest level in nearly 13 years. Recently, the 10-year Treasury yield touched a new 13-month high of 1.75%. The government bond yielded 1.72% around the time of the stock market close. Also, the public speculates that the move to the 2% level in the 10-year Treasury note could cause a stock market correction, or a more than 10% drop and a jump to 2.5% would obtain bonds more attractive than equities. Jerome Powell, the US Federal Reserve Chairman, didn't resemble concerned about the recent bond yields ascension. He said that the central bank isn't ready to pull the plug on its bond-buying program, thereby avoiding a situation like the 2013 "taper tantrum" that occurred when investors got scared about the end of the last easy-money era.


Taper tantrum refers to the 2013 US Treasury yields resulting from the Federal Reserve announcement of its quantitative easing policy's future tapering. Quantitative Easing (QE) involves a large purchase of bonds and other securities by the Federal Reserve. In theory, this method increases liquidity in the financial sector to maintain stability and promote economic growth. However, pouring a massive amount of liquidity into the financial markets opens the possibility of extreme inflation, which fuelled the Federal Reserve's decision to reverse its QE policy and raise interest rates. The Federal Reserve announced that they would taper the controversial QE policy it began in response to the 2008 financial crisis and recession, making 2013 a tumultuous year for emerging economies. This announcement is a massive negative shock to investor expectations as the world's biggest buyer of bonds reduces its purchase. Shooting up the US Treasury yield and triggered an outflow of capital from emerging market economies that unfolded over several months. The outflow of capital from emerging economies has a severe impact on the USD price against the IDR and the impact is magnified by the large account deficit that shows that countries are reliant on foreign investment to fund a significant amount of their economic activity.


Chairman of the Board of Commissioners of the Otoritas Jasa Keuangan (OJK) Wimboh Santoso warned of the risk of taper tantrums. Previously, Finance Minister Sri Mulyani, in responding to the possibility of this taper tantrum, had conveyed that several policies that the US authorities took could also affect Indonesia. Nevertheless, according to Sri Mulyani, Indonesia's economic condition is currently more favorable than the state in 2013. As we can see, the trade balance had started to have a surplus of US $ 1.96 billion in February 2021, while Indonesia's debt to GDP ratio was still at a low level of 38%. Adding to that, Indonesia's central bank, Bank Indonesia, emphasized that they are not bothered about the US's potential taper tantrums. This affair is mainly because Bank Indonesia predicts that Indonesia's financial market positions will differ from 2013 when the taper tantrum occurred. "We used to experience taper tantrums in 2013, and now, the conditions are much different. Previously, we only had one intervention (intervention in the spot market). Now we even have three interventions," Deputy Director of the Department of Economic and Monetary Policy Bank Indonesia, Riza Tyas Utami, said in an online press conference on Thursday (3/25). The first strategy is that Bank Indonesia will intervene in the market, not only in the spot market. The central bank will utilize this strategy to counteract the increase in US treasury yields impact that could make foreign investors depart from the market. The second strategy, Bank Indonesia will also develop a stronger Financial System Stability, and lastly, Bank Indonesia will also strengthen international cooperation with both countries and international financial institutions. All in all, the current remarkable progress of the economy, mentioning the vast distribution of COVID-19 vaccines, could lead to a new-normal condition more promptly. But we need to be aware that the advancement could point to a heavy impact on the market, as it is no longer highly 'backed' by the government.


Sources:

CNBC

CNN

The Financial Times


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