Time For Another Taper Tantrum? | The Big Conversation | Refinitiv

TL;DR

The Fed may announce the tapering of bond purchases at the next FOMC meeting, sparking concerns of a repeat of the 2013 "taper tantrum" in the market.

Transcript

In 2013, the announcement by the Fed that the  rate of QE bond purchases would begin to slow,   led to the now infamous 'taper tantrum', which saw  a big spike in bond yields, well in advance of the   actual slowdown in bond purchases. Taper talk has  again been a hot topic throughout this summer,   with many looking at this week's Jackson Hole  co... Read More

Key Insights

• 🙈 The taper tantrum of 2013 saw a spike in bond yields, outflows in emerging markets, and a surge in the dollar, resulting in a global profits recession.
• 🏅 Gold has an inverse relationship with real yields, and a rise in real yields could impact the price of gold.
• 🙃 The threat of yield curve control and declining inflation expectations could limit the upside in bond yields compared to 2013.
• 😒 The influx of retail investors and the use of passive instruments and options market by retail investors could affect the equity market's vulnerability to a taper announcement.
• ✋ Bond yields may be capped by consumer confidence, high prices affecting demand, the threat of yield curve control, or the Fed's rapid reversal in normalization attempts.
• 🧑‍💻 Emerging markets may continue to struggle, especially if China's tech regulatory crackdown intensifies.
• 😌 The US market has changed significantly since 2013 due to the increasing importance of passive funds, but it remains susceptible to short, sharp corrections and relies on the Fed's policy response to stabilize.

Questions & Answers

Q: What is the likelihood of the Fed announcing a taper at the next FOMC meeting?

There is a high probability that the Fed will announce tapering at the next FOMC meeting on September 22nd, given the overshoot of inflation measures.

Q: How did markets react during the 2013 taper tantrum?

The US 10-year yield doubled, emerging markets experienced outflows, the dollar strengthened, and commodity prices collapsed, leading to a global profits recession.

Q: Are current inflation expectations similar to those in 2013?

Current inflation expectations are at similar levels as in 2013, but the market's concerns about inflation could lead to further declines in these expectations if a taper announcement occurs.

Q: How might the bond market and equity market react to a taper announcement?

The bond market may not be as volatile as in 2013 due to the possibility of yield curve control and declining inflation expectations. The equity market, supported by passive flows and technical factors, may be protected from a surge in yields.

Summary & Key Takeaways

• The Fed's discussions on tapering bond purchases have raised concerns about a repeat of the 2013 "taper tantrum."

• In 2013, the taper tantrum led to a spike in bond yields, outflows in emerging markets, and a surge in the dollar.

• This time, the market is more prepared, but risks remain, particularly for gold and emerging markets.