ISSUANCE TANTRUM VS TAPER TANTRUM
On May 22, 2013, the Chair of the Federal Reserve, Ben Bernanke, declared that the Fed would start to reduce the bond buying program that began in 2008. Over the course of the next four months the 10-year Treasury yield rose from a low of 1.63 on May 2, 2013, to 2.99 on September 5, 2013, in what became known as the Taper Tantrum. Although, at the time the fixed income markets were in full panic mode, by the end of January of 2014, the 10-year had completed a round trip and touched 1.64, almost the exact low of just prior to the Taper Tantrum.
Since mid-July this year we have witnessed a breakout in yields. On July 19, 2023, the yield on the 10-year Treasury was 3.75. By the end of September, a little over two months later, the 10-year Treasury yield had risen to 4.57, and looks on its way higher. Although there are a great numbers of factors that went into the breakout in Treasuries, the most likely culprits to catalyze the move were the combination of “higher for longer” rhetoric by the Fed combined with larger Treasury issuances to support the $2t budget deficit. Both in absolute-terms and percentage-terms, the move in yields since July was nowhere near as severe as the Taper Tantrum. However, the reaction of the risk markets has been significantly different.
In the four-month stretch between the interim low and high of yields in 2013 the S&P500 Index rose +3.6%. In contrast, in the last two months, as yields have drifted higher between July and the end of September the S&P500 Index fell -6.1%. The natural question, why did the equities rise during the much harsher rise 2013 and yet have they fallen in 2023?
There’s no easy answer to this question, but perhaps there are clues that we can pick up from confidence levels and action in real yields. Consumer confidence is an interesting statistic because it can be deconstructed into various components, and largely approximated by splitting it into factors including stock market performance, inflation, feelings associated with employment and politics. If we look at the University of Michigan Survey of Consumer Sentiment Index, comparing 2013 and 2023 we find some interesting differences. While rates were rising, in 2013, so was consumer confidence. Given that the stock market was rising, some of this is to be expected, but there are stark differences in relation to inflation, employment, and politics, which today are all registering deep levels of depression based on survey answers. In addition, the consumer is battling higher mortgage rates, higher credit cards rates, less credit available to consumers, the beginning of student loan repayments, a daily barrage out of Washington causing constituents, allies and enemies to question the effectiveness of Congress and arguably the most tense geopolitical conditions since World War II. Consumers are losing confidence. The final shoe to drop in confidence is the employment market, which is the crutch holding up the markets. As we’ve noted, this is particularly concerning because the Federal Reserve is explicitly targeting the employment market as something they want to see weaken.
Another major difference between 2013 and 2023 is the difference in real rates, the inflation adjusted yield on the 10-year Treasury. Real yields are a good indicator of the tightness of Fed policy. In recent history when real yields spike above 200 bps the economy’s engines stall and the proverbial plane that looked to be headed for soft landing, begins spinning out of control towards the ground. During the Taper Tantrum real yields rose from a low just prior to the Taper Tantrum of -65 bps to 74 bps. Although the rise in real yields was large, the economy could still function in the face of the rate headwind because it remained below the 200 bps threshold. Contrast in 2023, even though the move in interest rates has been a smaller magnitude, because inflation has fallen faster than it did in 2013, the impact to real yields has been amplified, with real yields rising from 148 bps to 245 bps. Although the magnitude is similar between 2013 and 2023, real yields have breached the 200 bps threshold where the economy hits stall speed. There is a good argument the only way to keep the economy from entering a tailspin would be to begin cutting interest rates immediately. Unfortunately, the Fed is fixated on a 2.0% arbitrary inflation target that may only be attainable when the economy is flat on its back.