Taper Tantrum

The taper tantrum refers to the sharp rise in Treasury yields during May-September 2013, triggered when Fed Chair Ben Bernanke testified that the Fed might begin reducing ("tapering") its monthly asset purchases under QE3.

The market impact was swift:

  • 10-year Treasury yield surged from 1.63% in early May to 2.98% by September — a move of +135 bps in roughly four months
  • Mortgage rates jumped, threatening the housing recovery
  • Emerging market bonds and currencies sold off sharply as global capital flows reversed

The taper tantrum was significant because it revealed how dependent markets had become on QE:

  • The mere suggestion of reducing purchases (not stopping, not selling) triggered a major selloff
  • It demonstrated that QE operates partly through expectations — the market prices not just current purchases but the expected future stock of Fed holdings
  • It forced the Fed to develop more careful communication strategies around balance sheet policy

The episode also illustrated a term premium repricing. The ACM model shows term premium spiking in mid-2013 as the market adjusted to the prospect of reduced central bank demand for duration.

The taper tantrum is referenced in several blog posts on this site, including the ChatYCP announcement and discussions of how policy communication drives curve movements.

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Related Terms

  • Quantitative Easing — Large-scale central bank asset purchases designed to lower long-term yields when the policy rate is at or near zero.
  • Quantitative Tightening — The process of reducing the central bank's balance sheet by letting bonds mature without reinvestment, the reverse of QE.
  • Term Premium — The extra yield investors demand for holding longer-maturity bonds over rolling short-term debt.
  • FOMC — The Federal Open Market Committee, the Fed's policy-making body that sets the federal funds rate target.