2013 Taper Tantrum

On May 22, 2013, Fed Chair Ben Bernanke testified to Congress that the FOMC could begin tapering asset purchases "in the next few meetings" if economic data continued to improve. The market reaction was immediate and violent. 10Y Treasury yields spiked from 1.62% to over 3.00% by year-end, one of the most rapid bond selloffs in history. Emerging markets took the brunt. The "Fragile Five", Brazil, India, Indonesia, Turkey, South Africa, saw their currencies drop 15-25%. EM equities fell. Local-currency debt spreads widened. The trade wasn't about US economic strength; it was about the removal of dollar liquidity that had flooded EM fixed income as global investors reached for yield during QE. The Taper Tantrum established the playbook for every subsequent Fed communication pivot. Markets learned to front-run Fed moves rather than wait for announcements. The Fed learned that even hints of tightening could cause cross-asset disruption far greater than the actual policy change. Subsequent tapering, which actually began in December 2013 and wound down smoothly, passed with almost no market impact because the shock was priced in advance.