Hello, I'm RJ Gallo, Senior Portfolio Manager, Federated Hermes.
Do you think another taper tantrum is possible?
The taper tantrum was a unique moment in fixed-income history, if you will. 2013, Fed Chairman Bernanke suggests the Fed was going to slow their long-term asset purchases. They were going to slow their pace of bond buying, taper their purchases. The market didn't expect him to say that. It was a surprise. When you surprise market, you get bigger market moves, and you got a big market move. The ten-year treasury finished that year around 3%. In spring of that year, it was around 1.6. It was a very, very large increase in bond yields across the curve and the ten-year is a good example. At the time, a lot of investors feared capital loss and they were pulling money out of bond funds. Ironically, as you fast forwarded to 2014 and 2015, bond yields then subsequently decline. Back then, we didn't know what tapering would bring. There was a challenge to the market. Is tapering tightening? And many felt the answer was yes, when in fact, tapering was the equivalent of pulling your foot off the accelerator of a car, but it was not yet putting on the brakes. Putting on the brakes is tightening, and the tightening that followed the 2013/2014 taper didn't happen until the end of 2015.
So the market now understands the Fed can pull its foot off the accelerator and not yet put on the brakes. They're not linked in time. And as a result, I think the market's going to be a little bit more comfortable that a tantrum does not have to result from the taper. There's nothing like having a precedent to look to. The second thing I would note that should prevent a tantrum, the tantrum being a spike in bond yields in a disorderly way, I think that the fact that the Fed now has an average inflation targeting regime, where they want to see inflation stay above 2% for an extended period before they actually raise rates, that's another factor that could mute the bond market's response to the taper news.
Disclosure: Views are as of June 22, 2021, and are subject to change based on market conditions and other factors. This should not be construed as a recommendation for any specific security or sector. Investments are subject to risks and fluctuate in value. Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices. Yield Curve is a graph showing the comparative yields of securities in a particular class according to maturity. Securities on the long end of the yield curve have longer maturities. Duration is a measure of a security's price sensitivity to changes in interest rates. Federated Investment Management Corp. 21-10095 (7/21)