Central bank tapering and the unwinding of at least part of the trillions of dollars that has been pumped into the global economy over the past year is making its way into investment debates at money management firms.
Executives think such tapering will have less effect on markets than the taper tantrum caused by then-chairman of the Federal Reserve Ben Bernanke's comments in 2013, largely because the Fed has learned from that episode and therefore is expected to carefully flag its planned unwinding.
But not expecting a taper tantrum does not mean managers think the market reaction will be benign, and, as such, managers are tweaking portfolios in terms of duration in particular.
"The sheer scale of QE (quantitative easing) and the amount of support that has provided to financial markets is such that when we do reach a kind of inflection point, which will come with tapering, then … that's going to be potentially quite a big deal for markets," said David Riley, chief investment strategist at the $75.2 billion BlueBay Asset Management LLP in London. "And so it's definitely something which is starting to come onto the radar and people are getting focused on that."
Fed committee members are starting to signpost tapering, introducing the topic into the broader market narrative and discussion "to I think pave the way for us scaling back … the volume of asset purchases. I reckon with the major central banks — the Fed and ECB (European Central Bank), but also the Bank of Japan and to a lesser extent the Bank of England and others, they've probably bought about $6 trillion worth of assets since March last year," Mr. Riley said — a figure that is "off the charts" relative even to the 2008-2009 global financial crisis.
That stimulus has provided a huge amount of support for markets and facilitated to a great extent the market recovery from the depths of the COVID-19 pandemic.
"The tapering is going to mark the first point of inflection in that — from that point on there's going to be at the margin less support coming from central banks and policymakers more generally. I think it is going to be a test for the market," Mr. Riley added.
Joern Wasmund, regional investment head for Europe, the Middle East and Africa at the €820 billion ($941 billion) DWS Group in New York, said the Fed has become better at communicating its decisions and so "we will not experience something similar like the Bernanke tapering. However, as soon as the Fed start hiking, the market knows the direction of the next move and the next move … this will have a meaningful impact on rates, particularly in five years."
As long as inflation expectations are kept under control, the Fed and other central banks moving to taper should be able to keep tapering and its effects on markets under control, Mr. Wasmund said.