Maybe the large drop in Treasury yields over the previous three months is mostly a trendy model of the taper tantrum.
That in all probability sounds odd, since again in 2013 the taper tantrum—a bond-market panic in regards to the Federal Reserve slicing its Treasury purchases—prompted the precise reverse response, and 10-year yields soared from 1.6% in Might of that 12 months to above 3% by the tip of December.
However bear with me: What occurred when the taper truly started was that yields dropped again, finally falling all the way in which all the way down to 1.6% once more.
So here’s a risk: 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 suppose the Fed will set charges over the following 10 years, plus or minus an quantity to replicate the chance of being fallacious. The Fed shopping for bonds helps to cut back that danger premium, and so ought to, at the least within the Fed’s concept, scale back yields, all else being equal. Tapering, due to this fact, ought to improve them.
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