Macroscope | Forget the 2013 ‘tantrum’ playbook as the US Fed prepares to taper its bond buying

In 2013, Treasury yields fell as tapering began, leaving bond and corporate debt markets higher. This time, US bond yields are likely to rise and could dampen returns in a stock market already jumpy from overheated valuations

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US Federal Reserve Board chairman Jerome Powell testifies on the Fed’s response to the pandemic on June 22. Unlike in 2013, when a surprised market went into a “taper tantrum”, this time, Powell has been carefully preparing the ground. Photo: AFP

Published: 1:30am, 18 Sep 2021Updated: 2:45am, 18 Sep 2021

As the US Federal Reserve gets ready to roll back its quantitative easing programme and start tapering its asset purchases by the end of the year, investors can’t help but recall the 2013 market “tantrum” that greeted the Fed’s previous attempt to taper its bond buying, as they decide what to do now.

But there are important differences between then and now that should caution investors against simply copying and pasting their 2013 playbook.

After the Fed announced, in December 2013, that it would begin to reduce its bond buying, both equities and fixed-income securities ended up having a good year in 2014. The S&P 500 was up 13.7 per cent, and the MSCI Asia-Pacific ex-Japan index was up 3.1 per cent. US government bonds and investment-grade corporate debt also delivered returns of 6.1 per cent and 7.6 per cent to investors that year. So far so good.

Yet, if you dig deeper into the numbers, you can see there were considerable differences between markets that showed the Fed’s policy change was not the only game in town.

While US equities brought handsome returns, European equities were still struggling in the aftermath of the region’s sovereign debt crisis, with the MSCI Europe index down 5.7 per cent in 2014.

Masked demonstrators in June 2012 depicting (from left) then French president Francois Hollande, German Chancellor Angela Merkel, Spanish prime minister Mariano Rajoy and Italian prime minister Mario Monti simulate playing a soccer match to protest against the euro-zone debt crisis, in front of the Chigi Palace in Rome. Photo: Reuters

In Asia, the 3.1 per cent return generated by the MSCI Asia-Pacific ex-Japan index in 2014 also masked a wide divergence among Asian markets. India was up 26 per cent that year while South Korea was down 10.7 per cent.