Should you fear the taper?

CENTRAL banks have been talking about tightening monetary policy, starting with tapering the amount of bond purchases they make each month. The Bank of Canada and the Reserve Bank of Australia have already started tapering and the US Federal Reserve has started discussing it.

However, some investors may still remember the taper tantrum of 2013 and others might have at least heard about it. Ben Bernanke, the Fed chairman at that time, suddenly revealed that the Fed was thinking about tapering during his May 22, 2013 congressional appearance. But just how badly did the financial markets react?

From the accompanying table, the damage done to financial markets does not look that bad. However, an increase of 47 basis points for 10-year US Treasuries ("UST") was still quite impactful. On further hindsight analysis, the S&P 500 index still managed to appreciate 29.6 per cent one year from the 2013 bottom, despite the volatility following Mr Bernanke's congressional appearance.