Maybe the massive drop in Treasury yields over the previous three months is mostly a trendy model of the taper tantrum.
That most likely sounds odd, since again in 2013 the taper tantrum—a bond-market panic concerning the Federal Reserve slicing its Treasury purchases—prompted the precise reverse response, and 10-year yields soared from 1.6% in Could of that 12 months to above 3% by the tip of December.
However bear with me: What occurred when the taper really started was that yields dropped again, ultimately falling all the way in which right down to 1.6% once more.
So here’s a chance: Traders have realized their lesson. The Fed is once more readying the markets for the tapering of its bond purchases, however as a substitute of a repeat of 2013’s tantrum, there was a rush to purchase bonds, and a giant drop in yields.
If this sounds counterintuitive, don’t fear: Bond markets are bizarre. At its most simple, the 10-year yield is a measure of the place buyers assume the Fed will set charges over the following 10 years, plus or minus an quantity to mirror the danger of being mistaken. The Fed shopping for bonds helps to cut back that threat premium, and so ought to, not less than within the Fed’s idea, cut back yields, all else being equal. Tapering, subsequently, ought to improve them.