Hello, I'm R.J. Gallo, Senior Fixed Income Portfolio Manager at Federated Hermes.
Is it too early to worry about a repeat of 2013's taper tantrum?
Recently, there's been increasing market chatter in fixed-income markets about the taper tantrum. Let me remind you, in 2013, the Federal Reserve floated the idea of tapering, or reducing gradually, their bond purchases, or reducing quantitative easing is another way of saying it. The introduction of that idea, which was floated as a trial balloon by then Fed chairman Bernanke, shocked the bond market. Ten-year treasury yields in the spring of 2013 were at 1.6%. They ended the year at 3%. They basically spiked. With that, we had heavy redemptions from bond mutual funds, and bond investors struggled, certainly in terms of absolute and relative performance. I will note, however, the economy expanded, and stocks did extremely well. So the taper tantrum did not take victims across all financial markets. It hurt high-quality bond portfolios the most. So here we are in 2020. The Fed is back in the QE game, buying 120 billion a month in treasuries and mortgages. And it's a natural question that investors remember, well, the last time the Fed was doing this, they had to eventually dial it back.
Are we going to face that again? And if so, fears of a taper tantrum arise. I would argue such fears are a little premature in 2021. The taper tantrum happened in 2013 because the economy was doing sharply better. We think the economy is also going to be doing better in 2021, but we think the Fed is much more patient. They are eager to see inflation build to over 2%. In fact, the Fed recently added guidance in their FOMC statement, saying they want to see substantial progress towards their inflation and employment goals before they would alter their asset purchases or before they turn down or taper QE. I think all of that should be somewhat soothing to the market. It's a natural concern. Interest rates are near record lows. Durations are relatively long right now in the treasury marketplace because of the mix of securities that are outstanding and the level of interest rates. So you don't have a lot of income cushion before you experience a total return that's negative if interest rates start to rise rapidly. We just don't think it's a 2021 event. We will be talking about this for a while, of course, because substantial progress, which is what the Fed tells us to look out for, that's sort of vague. And that keeps investors wondering, when will the turn, when will the taper occur? Likely a 2022 event in our view. Stay tuned.
Disclosure: Views are as of Jan. 14, 2021 and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector. Past performance is no guarantee of future results. Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices. Duration is a measure of a securitys price sensitivity to changes in interest rates. Securities with longer durations are more sensitive to changes in interest rates than securities of shorter durations. QE stands for quantitative easing. Federated Investment Management Company 21-40020 (1/21)