What is the Taper Tantrum?

By Harshal Vispute|Updated : August 11th, 2022

The investor's immediate response after the Federal Reserve announced reducing its asset purchases is known as a "taper tantrum." When a central bank reports that its asset-buying program will be tapered in the future, investor reactions cause bond rates to move in what is known as a "taper tantrum." Even if the central bank does not immediately stop buying bonds, investors may unload their holdings, driving up yields. According to reports, these sales are a "tantrum" in response to the news of a tapering.

Define Taper Tantrum?

Investors have a "taper tantrum" in response to the announcement that the central bank is decreasing or ceasing its bond purchases. Investors may sell bonds in response, which would drive the yield and down bond prices—known as a taper tantrum, the rapid increase in bond yields that followed the central bank announcement.

In May 2013, the phrase was first used. The American Federal Reserve (Fed), whose chairman at the time was Ben Bernanke, declared the central bank would eventually start to reduce its asset purchases. Investors knew that a potential demand decline would result in lower bond prices and higher yields because the Fed was one of the largest buyers of bonds. Investors immediately sold their bonds as a result, which increased profits. The 10-year Treasury yield increased from 2% in May to 3% in December.

Investors' unanticipated response to the Fed decreasing its bond purchases is known as a "taper tantrum." Bond yields will increase as investors sell in anticipation of the central bank's tapering if there is a taper tantrum. Investors may not change their approach if they anticipate the central bank to reduce bond purchases.

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FAQs

  • The investor's unanticipated response to the Fed decreasing its bond purchases is known as a "taper tantrum". Investors' reactions to the Fed's announcement that it will soon start to taper off its bond purchases in 2013 gave rise to the phrase. 

  • The process of either slowing down or withdrawing from a monetary stimulus program that has already been implemented and judged successful begins with tapering.

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