Taper Tantrum
Candlefocus EditorThe taper tantrum of 2013 is best remembered for triggering a drastic spike in United States Treasury yields. It caused collective panic in the financial markets and sparked fear that the market would crumble as a result of the Federal Reserve's decision to close its quantitative easing (QE) program.
The Federal Reserve began the QE program in 2008, in response to the recession that ensued. The program involved increasing liquidity in the financial markets by taking certain actions such as buying back government bonds and mortgage-backed securities. This was meant to maintain low interest rates, allowing banks to lend more freely, and pump money into the crumbling market in order to stimulate the economy.
But the party was short-lived, as the Fed announced in 2013 that they would slowly begin to wind down the program. As such, they had created an environment in which investors would need to absorb the Treasury bonds in order to satisfy the demand for government debt. This announcement caused panic in the market as investors believed that without the Federal Reserve's intervention, the market would collapse.
Despite these worries, the market continued to recover even after the start of the taper tantrum. This was due to a combination of factors, the most prominent of which was the Fed's gradual efforts to wind down QE. The Fed also responded to the taper tantrum by providing guidance to investors, and by providing clearer details on when they expected the QE program to end and when to expect interest rate increases. The Fed even suggested that it was not ruling out the reintroduction of certain aspects of QE if there was a strong enough economic threat.
Ultimately, the taper tantrum of 2013 was an example of the power of collective panic. Despite being fundamentally unjustified, it created worry and volatility in the market that lasted for months afterwards. This fear however, was eventually calmed by the Federal Reserve’s clarity and willingness to provide advice and guidance to investors, in order to avoid further market destabilization.