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2015
Research Briefing
Global Outlook
Bond Tantrum II: the possible consequences
The recent sharp rise in global bond yields has much in common with the early phase of 2013s taper
tantrum especially the sharp rise in the term premium. Using the Oxford Global Economic Model, we
examine the possible consequences of the rise in yields extending into a Tantrum II.
A further rise in the term premium in advanced economies of around 50 basis points (taking it toward its long-term
average) would be likely to induce sharp rises in yields in emerging markets as well. As a result, the overall impact
of a Tantrum II scenario could be a significant hit to world GDP.
We can get an insight into just how serious the impact of an extended and widespread rise in global yields might be
using the Oxford Global Economic Model. In our scenario, global GDP growth is around half a point weaker in 2016
and 2017 than in our baseline forecast.
Fitted 10-year
yield
3.0
2.5
2.0
Risk neutral
yield
1.5
1.0
Term premium
0.5
0.0
-0.5
-1.0
2012
2013
2014
2015
Economists: Adam Slater, Lead Economist | Tel: +44 1865 268934 | e-mail: aslater@oxfordeconomics.com
17 Jun
2015
Research Briefing
Looking back to 2013, it was notable that the ultimate rise
in yields in several emergers was much larger than in the
advanced economies: Indonesia, Turkey and Brazil saw
rises in excess of 300bp.
1.5
2013 May-August
1.0
140bp
from t
0.5
60bp
from t
0.0
Indonesia
2015 March-June
-0.5
t-60
Turkey
Poland
t-40
t-20
t+20
t+40
t+60
t+80
Australia
Hungary
Apr 1-Jun 15
S.Africa
Q1-Q4 2013
Thailand
Korea
Malaysia
Brazil
India
China
-1.0
0.0
1.0
2.0
3.0
4.0
30
20
10
0
-10
-20
2010
2011
2012
2013
2014
2015
Source : IIF
1
Economists: Adam Slater, Lead Economist | Tel: +44 1865 268934 | e-mail: aslater@oxfordeconomics.com
17 Jun
2015
Research Briefing
1.0
1.5
0.0
2.5
3.0
-3
-2.5
-2
-1.5
-1
-0.5
Scenario
1
0
2005
2007
2009
2011
2013
2015
2017
Economists: Adam Slater, Lead Economist | Tel: +44 1865 268934 | e-mail: aslater@oxfordeconomics.com
17 Jun
2015
Research Briefing
Conclusion
Although the recent rise in yields in the US and the
Eurozone has an element of healthy correction about it,
there is a risk that it could extend into something more
economically damaging.
In particular, there is great uncertainty about how much
higher the term premium embodied in long-term rates
may rise. The term premium remains low by historic
standards and compared to the levels reached in the
2013 taper tantrum. A correction towards those levels
could be sparked by greater uncertainty about the future
path of monetary policy (or inflation), with this risk
perhaps increased by the large gap between Fed
projections of the future path of short rates and those in
the market. Such a correction (if sustained) could see 10year yields jump as much as 50-100bp, with potentially
even larger knock-on effects on emerging markets.
Economists: Adam Slater, Lead Economist | Tel: +44 1865 268934 | e-mail: aslater@oxfordeconomics.com