In May 2013, Federal Reserve Chair Ben Bernanke announced that the Fed would start tapering its quantitative easing in the near term. The announcement, which came after almost five years of bond purchases to support markets and encourage consumer spending, sent a shock through the markets as the Fed’s reduction in monetary stimulus arrived sooner than expected.
Due to the prospect of less money circulating in the future, bond investors became desperate to sell their bonds, and in a corresponding manner, yields rose sharply. According to the Board of Governors of the Federal Reserve System, the reaction to the announcement caused the 10-Year Treasury yield to increase from 2% in May 2013 to more than 3% in December 2013. Those seven months were dubbed the “taper tantrum” due to investor responses.
Today, many investors are worried that we are in for a repeat of the 2013 taper tantrum. In July, the Fed signaled that it would finally start reducing its most recent quantitative easing policy at the end of the year. Since March 2020, the Fed has been buying bonds at an increased rate in response to the ongoing COVID-19 pandemic. According to the Board of Governors of the Federal Reserve System, the Fed owned $3.6 trillion in Treasury notes on March 18, 2020. As of July 14, 2021, that portfolio was valued at $8.3 trillion.
The difference between now and 2013 is in investors’ response to this tapering announcement. Whereas in 2013 the announcement came as a shock to investors and caused immediate panic throughout the market, the 2021 response has been much calmer. As of Oct. 22, 2021, the 10-Year Treasury yield was 1.64%, compared to 1.24% on July 30 of this year. Although there has been a slight increase in the 10-Year yield since Jerome Powell’s announcement of an upcoming taper, it has come as more of an expected, natural response to the Fed reducing funds in circulation.
However, the environment for a repeat taper tantrum is certainly set up to be there. The Fed has been buying bonds at a record pace for over a year now to offset negative market environments, and people have become reliant on the stimulus that the Fed has been injecting into the market. In 2013, panic set in upon an announcement of a “possibility” in the future. Though no action had been taken, bond investors had a tantrum and drove bond prices down.
This time, investors have been eased into the process. COVID-19 was an unexpected catastrophe, and the Fed has been using quantitative easing as a “transitory” tool to keep investors and consumers afloat. With that being said, investors have been aware that at some point, the Fed can’t keep supporting the markets through ongoing stimulus.
The lesson to be learned from the taper tantrum in 2013 is that quantitative easing leads to its desired effect on prices. When the Fed increases bond buying, investors and consumers are spending money, inflation is kept at a “healthy level,” and interest rates remain low. Although market conditions are similar now to those during the 2013 taper tantrum, the announcement from the Fed of an upcoming taper has not come as a surprise this time, and bond investors seem better prepared for the news.