{"id":2199,"date":"2016-09-21T00:09:50","date_gmt":"2016-09-21T00:09:50","guid":{"rendered":"http:\/\/cfe.econ.jhu.edu\/?p=2199"},"modified":"2021-09-14T13:35:54","modified_gmt":"2021-09-14T13:35:54","slug":"we-love-a-good-sequel-but","status":"publish","type":"post","link":"https:\/\/krieger.jhu.edu\/financial-economics\/2016\/09\/21\/we-love-a-good-sequel-but\/","title":{"rendered":"We love a good sequel, but \u2026"},"content":{"rendered":"\n
Over the last several weeks, investors faced the realizations that the Fed might take one more step on the road to normalization and that Mario Draghi\u2019s \u2018Do what it takes\u2019 might have morphed into \u2018if pushed, we could do a bit more.\u2019 This predictably brought a jump in bond yields around the world and talk of taper tantrum, the sequel.<\/i> The more excitable of the monetary policy hawks and doves both tend to hear the words taper tantrum<\/i> with a sense of horror. To many doves, the jump in yields following Bernanke\u2019s taper talk threatened a 1937-like disaster and was proof that even a small step toward normalization is fraught with danger. To many hawks, the incident shocked the skittish Fed, causing it to hold rates unnaturally low ever since.<\/p>\n\n\n\n
We think the tantrum period does hold important lessons for today, but those hawk and dove stories just given don\u2019t make sense. Financial data make the taper period appear as if market participants perceived the dawning of a golden age\u2014stock market soars, risk spreads shrink, and indicators of future real yields bounce back from the gloomiest values ever recorded. If warranted, such rosy views should have been welcome. But in the years since the end of the tantrum, those nominal and real yields have slowly slid back to the gloomy pre-tantrum levels (Fig. 1). The simplest story to tell of the full period is one of (ex post, at least) unwarranted optimism that was quickly gained and slowly dissipated. That perspective offers up some important lessons for today\u2019s policy environment.<\/p>\n\n\n\n Fig. 1. The 10-year Treasury yield and 5-year forward 5-year (real) TIPS yield. Sources: FRED and Bloomberg.<\/p>\n\n\n\n Let\u2019s review some tantrum facts. Over the 4 months between the beginning of May 2013, just before Bernanke first spoke of the taper, and the beginning of September, the Treasury 10-year yield jumped nearly 150 basis points (Table 1). A hawkish jolt? Perhaps, but measures of the expected path of the policy interest rates didn\u2019t shift much.[1]<\/sup><\/a><\/a> Moreover, over those four months, the S&P500 rose almost 4 percent and various risk spreads fell. One of our favorite indicators, the 5-year forward, 5-year real yield on TIPS (labeled 5×5 TIPS) had sagged to zero over the beginning of 2013. Over the tantrum months, this indicator of real yields coming 5 to 10 years in the future rebounded by almost 200 basis points, rising to a level not seen since mid-2011.<\/p>\n\n\n\n