What is the Taper Tantrum?

Define Taper Tantrum

Investors have had a “taper tantrum” in response to the announcement that the central bank is reducing or ceasing its bond purchases. Investors may sell bonds in response, which would lower yields and bond prices – known as a taper tantrum, the rapid rise in bond yields that followed the central bank’s announcement.

• In May 2013, this phrase was used for the first time in the US.
• The US Federal Reserve (Fed), headed by Ben Bernanke, announced that the central bank would eventually begin reducing its asset purchases.
• Investors knew that a potential drop in demand would result in lower bond prices and higher yields because the Fed was one of the largest buyers of bonds.
• As a result, investors immediately sold their bonds, increasing profits.
• The 10-year Treasury yield rose from 2% in May to 3% in December.
• The unexpected reaction from investors to the Fed to reduce its bond purchases is known as the “taper tantrum.”
• Bond yields increase as investors sell in anticipation of a central bank taper if a taper tantrum occurs.
• Investors may not change their approach if they expect the central bank to reduce bond purchases.

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