What Is the Taper Tantrum?

Taper Tantrum Explained in Three Minutes

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Definition
A taper tantrum is a knee-jerk reaction by investors after the Federal Reserve announces scaling back its asset purchases.

A taper tantrum refers to the movement in bond yields caused by investor reactions to a central bank announcing future tapering of bond-buying programs. Even if the central bank does not stop purchasing bonds immediately, investors may sell off their bonds, which forces yields to rise. These sales are said to be a “tantrum” in reaction to the news of a tapering.

Definition and Examples of a Taper Tantrum

A taper tantrum is when investors have a “tantrum” or a reaction to news of the central bank slowing or stopping bond purchases. Investors may react by selling bonds, which topples the price of bonds and raises the yield. The sharp climb in bond yields after the central bank announcement is called a taper tantrum.

The term was coined in May 2013. The then U.S. Federal Reserve (Fed) Chairman, Ben Bernanke, announced the central bank would begin tapering asset purchases at a future date.

Note

Tapering only refers to the Fed scaling back bond and asset purchases. It does not mean the central bank is selling the securities it bought.

Since the Fed was one of the biggest buyers of bonds, investors knew a future reduction in demand would cause bond prices to fall and yields to rise. This caused investors to sell their bonds immediately and as a result, yields rose. The yield on 10-year Treasuries rose from 2% in May to 3% in December.

How Does a Taper Tantrum Work?

While investors typically react to any central bank news, the strength of their reaction depends on whether the news is expected or unexpected. If investors are not anticipating an announcement of tapering asset purchases, this new information may cause them to change their strategy. 

Note

The Fed is the largest bond buyer in the market.  If it slows its bond purchasing, there is less demand for bonds in the future. With less demand, prices of bonds will fall and yields will rise. 

Investors will get a head start by selling off bonds causing yields to rise sooner. Since they react before the central bank has actually stopped buying bonds, it is as if investors are having a tantrum at the news of tapering.

If instead, investors expected the news from the central bank, there would be no new information that would alter their strategy.

For example, the Federal Reserve hinted at tapering in July 2021, but the 10-year Treasury yield barely moved. This is because investors already anticipated the central bank's announcement.

Similarly, in November 2021, the Federal Reserve announced they would begin tapering later that month. The market did not react to this news by selling off bonds as this was expected because of earlier communications by the Fed.

What Does a Taper Tantrum Mean for Investors?

A taper tantrum could change investors' strategies as U.S. bond yields rise. For example, in 2013, financial markets were disturbed globally. As bond yields rose in the United States, those bonds became a more attractive investment than emerging-market assets. As a result, capital flowed out of emerging markets.

Since tapering can be a part of a move away from an accommodative monetary policy, long-term rates could rise as investors shift expectations for the future of the overall economy. The steepening or flattening of the yield curve may change the investment horizon or time period in which investors look to hold assets.

Note

Institutional investors may look at the shape of the yield curve as a market indicator to predict recessions.

For regular long-term investors, a taper tantrum likely will not mean much in terms of a change in investment strategy. While bond yields in the future will be more attractive compared to other investment options with relatively smaller yields, a taper tantrum can be viewed as a short-term reaction.

Key Takeaways

  • A taper tantrum is a reaction by investors to the unexpected news that the Fed is slowing bond purchases.
  • The term originated in 2013 when investors reacted to an announcement from the Fed that they would be tapering bond purchases in the near future.
  • A taper tantrum will cause bond yields to rise as investors sell in anticipation of the central bank’s tapering. If investors expect the central bank to curb bond buying, they may not alter their strategy.

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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Board of Governors of the Federal Reserve System. "The Economic Outlook.”

  2. Federal Reserve Economic Data. “No Taper Tantrum This Time?"

  3. Federal Reserve. “Federal Reserve Issues FOMC Statement.”

  4.  Brookings Institute. “What does the Federal Reserve mean when it talks about tapering?

  5. Federal Reserve Bank of New York. “The Yield Curve as a Predictor of U.S. Recessions.”

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