The taper tantrum, part II?25 Feb 2021 13:28
In 2013, the US economy looked as though it was properly recovering from the financial crisis.
So the Federal Reserve chief at the time, Ben Bernanke, decided that it might be a good idea to stop printing quite as much money.
He told markets this. They threw a major wobbly, known as the “taper tantrum”.
The big question today is: are we heading for a repeat performance?
The ten-year US Treasury bond now yields about 1.4%. In other words, the US government will pay you 1.4% interest a year if you agree to lend it money for a decade. In the grand scheme of things, that's a very low number.
Before the start of 2020, you had to go back to the big deflation panic of 2016 (when Britain voted to leave the EU) to find the yield anywhere near that low. Prior to that, you're looking at the 1940s.
However, as you might have noticed, 2020 was an odd year. When the global pandemic took hold, US Treasury yields ended up plumbing never-before-seen depths. In March last year at one point, the yield fell to less than 0.35%.
And in summer it was still sitting around 0.5%. So while the yield on the ten-year is still extremely low, it has just about tripled in the last six months. That's a rapid move in a very important price.
Why is it moving higher? Because markets expect a strong recovery for the US economy. On top of that, they expect the US government to push through more “stimulus”. And on top of that, some expect the US government to go further and spend a lot more money on “greening” the country's infrastructure.
If bond yields rise because markets expect strong growth, that's probably not going to cause markets a major headache in the short term. But there's another reason why bond yields might rise, notes Oliver Jones of Capital Economics - and that's if they think that the Federal Reserve is going to tighten up monetary policy earlier than expected.
This is what happened in 2013's “taper tantrum”, when then-Fed chief Ben Bernanke rattled markets by attempting to map out an exit from quantitative easing, in response to an improving US economy.
So what's going on this time? Markets do seem to be rattled. The Nasdaq in particular has struggled over the past few days; gold prices have done likewise. So is another spasm of panic on the horizon?
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