Taper tantrum? Only if somebody wakes the U.S. bond market

In February and March , as the U.S. economy began to recover from the coronavirus pandemic, a selloff in U.S. Treasurys sent yields up sharply, with the 10-year benchmark TMUBMUSD10Y, 1.554% coming within a whisker of 1.8%. Partly as a result investors began to rotate away from technology and other growth stocks that are sensitive to higher interest rates which had performed well during the pandemic, limiting further gains in the major stock indexes.

Related: Why the bond market might not suffer another taper tantrum when the Fed signals it’s ready to move U.S. 10-year yields “rose from a low of 1.4% in 2012, to 3% during their tantrum. In this cycle, the rise has been from 0.5% to a high just below 1.8%. That’s comparable in relative terms. The eventual peak in U.S. yields in 2018 was 3.25%. Can’t we accept that the taper tantrum has already happened?” he wrote.

As the chart above shows, searches for “taper tantrum” via Google have started to slow after spiking last month. And bond yields have come down even as Federal Reserve officials have moved from insisting it was too early to contemplate even thinking about slowing asset purchases to acknowledging that such discussions may be on the agenda sooner rather than later.

“It is notable how few hikes are priced into front-end interest rates compared to the tantrum in 2013, even as rapid progress on vaccinations and prospects of a rapid recovery would warrant such a risk premium,” they said, in a June 3 note. Others expect the ECB to take action. Policy makers are likely to announce a slowdown in purchases of bonds under the ECB’s pandemic emergency purchase program, or PEPP, which currently run at around 20 billion euros a week, while “sending a dovish medium-term message,” wrote Luigi Speranza, chief global economist at BNP Paribas, in a note.

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