Central banks follow a fine line as inflation rises

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Investors could be frightened if central banks abandon monetary support too quickly and unexpectedly, analysts warn according to a report by S&P Market Intelligence.

“The ‘pact’ between investors and central banks is that they will maintain stimulus packages and the bond markets will behave on their own. One fake word from a central banker and it’s 2013 again, ”Colin Finlayson, co-director of Aegon Asset Management at S&P Market Intelligence said in an email.

Currently, central banks around the world do not seem in a rush to end their quantitative easing programs.

But if investors lose confidence in monetary policy, a repeat of the 2013 bond yield debacle will be more likely, analysts tell S&P.

That year, Fed Chairman Ben Bernanke Ben Bernanke shook investors by indicating that the Fed would reduce its monthly purchases of Treasuries, triggering higher borrowing costs.

Right now, central banks are looking for the right time to turn off the taps on monetary support as vaccines roll out and countries unblock.

During the pandemic, the US Federal Reserve, European Central Bank, Bank of Japan, Bank of England and others bought trillions of dollars in government and corporate bonds – inflating their combined balance sheets to around $ 25 trillion – to keep borrowing costs low and limit the number of defaults and bankruptcies caused by Covid-19 lockdowns.

Investors are also increasingly concerned that central banks are out of step with the reality of inflationary pressures resulting from growing demand, supply constraints and heavy government spending.

This concern is worth watching, said Kambiz Kazemi, chief investment officer at Validus Risk Management.

“The worst-case scenario would be one in which the Fed continues to send an accommodating message despite a changing reality on the ground, only to change its position in the end,” he told S&P Market Intelligence. “This, combined with poor communication, will create a sense of bluntness which will translate into reduced risk to assets and higher rates.”

Looking ahead, Althea Spinozzi, fixed income strategist at Saxo Bank, said the longer central banks wait to shrink, the more chances there are for a temper tantrum.

The expert predicted that global yields can only rise and the first among central banks will lead the others.

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