Definition and Examples of a Taper Tantrum
A taper tantrum is when investors have a “tantrum” or a reaction to news of the central bank slowing or stopping bond purchases. Investors may react by selling bonds, which topples the price of bonds and raises the yield. The sharp climb in bond yields after the central bank announcement is called a taper tantrum. The term was coined in May 2013. The then U.S. Federal Reserve (Fed) Chairman, Ben Bernanke, announced the central bank would begin tapering asset purchases at a future date. Since the Fed was one of the biggest buyers of bonds, investors knew a future reduction in demand would cause bond prices to fall and yields to rise. This caused investors to sell their bonds immediately and as a result, yields rose. The yield on 10-year Treasuries rose from 2% in May to 3% in December.
How Does a Taper Tantrum Work?
While investors typically react to any central bank news, the strength of their reaction depends on whether the news is expected or unexpected. If investors are not anticipating an announcement of tapering asset purchases, this new information may cause them to change their strategy. Investors will get a head start by selling off bonds causing yields to rise sooner. Since they react before the central bank has actually stopped buying bonds, it is as if investors are having a tantrum at the news of tapering. If instead, investors expected the news from the central bank, there would be no new information that would alter their strategy. For example, the Federal Reserve hinted at tapering in July 2021, but the 10-year Treasury yield barely moved. This is because investors already anticipated the central bank’s announcement. Similarly, in November 2021, the Federal Reserve announced they would begin tapering later that month. The market did not react to this news by selling off bonds as this was expected because of earlier communications by the Fed.
What Does a Taper Tantrum Mean for Investors?
A taper tantrum could change investors’ strategies as U.S. bond yields rise. For example, in 2013, financial markets were disturbed globally. As bond yields rose in the United States, those bonds became a more attractive investment than emerging-market assets. As a result, capital flowed out of emerging markets. Since tapering can be a part of a move away from an accommodative monetary policy, long-term rates could rise as investors shift expectations for the future of the overall economy. The steepening or flattening of the yield curve may change the investment horizon or time period in which investors look to hold assets. For regular long-term investors, a taper tantrum likely will not mean much in terms of a change in investment strategy. While bond yields in the future will be more attractive compared to other investment options with relatively smaller yields, a taper tantrum can be viewed as a short-term reaction. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
