Taper tantrum

Taper tantrum

Subject: Economy

Context: With the yield on the 10-year US Treasury momentarily surging past 1.6 per cent the reaction of market across the world revived the memory of “taper tantrum” of 2013 (when the term originated).

Concept:

• Taper tantrum refers to the 2013 collective reactionary panic that triggered a spike in U.S. Treasury yields, after investors learned that the Federal Reserve was slowly putting the breaks on its quantitative easing (QE) (large purchases of bonds and other securities – Increases liquidity) program.
• Tightening of monetary policy through tapering led to Dollar supply reduction, capital outflows from emerging economies and exchange rate becoming weak (currency depreciation).
• Capital outflow is because when yields on the ultra-safe US treasuries rise, investors have reduced incentive to invest in riskier assets such as equity.
• This led to a surge in inflation to high double digits emerging economies.
• In 2013 it created the fear that the market would crumble, as the result of the cessation of QE (however nothing of that sort happened).
• Generally, this tapering is short-lived.

Possible implications of current tapering Tantrum

• This time, the markets are overvalued and investors fear that the yield spike can become the trigger for an extended market correction
• Existing investors may need to brace for a de-rating of stock valuations, new ones can perhaps look forward to a buying opportunity.
• A rise in bond yields may, however, be good for investors in small savings schemes and the GOI Floating Rate Bonds, where rates are linked to government bond yields and are reset periodically.
• those invested in debt mutual funds (especially longer duration ones) and listed bonds may have to brace themselves for more mark-to-market losses if yields continue to harden.