Back in 2013 the then-Fed Chair, Bernanke, promoted a surge in bond yields. Memories of this event have come back to investors at the start of the year as a couple of Fed speakers spoke about the Fed tapering bond purchases by the end of this year. This sent US bond yields higher. However, Powell was quick to quieten the impact of those voices on the market as he did not want a repeat of the ‘taper tantrum’ back in 2013. Why? It is due to this simple dynamic. Rising yields equals rising interest costs for the US in servicing their debt. See here for the impact on the US 10 year bond yields in 2013.

Chart

Rising debt costs

Bloomberg Economics published a chart that projected debt interest rate costs as a share of the United States GDP. They looked at three different scenarios. A 100bps shift in the yield curve (similar to 2013’s shift). A 200bps shift and a base rate case.

You can see the impact of these scenarios on the chart below.

Chart

Extra debt means larger repayments.

Why the Fed fears another ‘taper tantrum’?

It is no surprise that an increase in debt levels for world governments will necessarily mean larger repayments. However, a 100bps rise in the yield curve will mean a debt interest payment that is over 4% of the US’s GDP. A 200bps rise will equate to around 6%. So, this is why the Fed does not want to repeat the taper tantrum of 2013 and would like to keep rates as low as possible, for as long as possible.

Learn more about HYCM

High Risk Investment Warning: Contracts for Difference (‘CFDs’) are complex financial products that are traded on margin. Trading CFDs carries a high degree of risk. It is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved. Seek independent expert advice if necessary and speculate only with funds that you can afford to lose. Please think carefully whether such trading suits you, taking into consideration all the relevant circumstances as well as your personal resources. We do not recommend clients posting their entire account balance to meet margin requirements. Clients can minimise their level of exposure by requesting a change in leverage limit. For more information please refer to HYCM’s Risk Disclosure.

Analysis feed

FXStreet Trading Signals now available!

Access to real-time signals, community and guidance now!

Latest Analysis


Latest Forex Analysis

Editors’ Picks

EUR/USD struggles around 1.2050 amid dollar strength, ahead of US PMI

EUR/USD is pressured around 1.2050 as returns on US debt advance, supporting the dollar. German states have reported mixed CPI reads for February. The US ISM Manufacturing PMI and the ECB's weekly bond purchases are awaited. 

EUR/USD News

GBP/USD retreats from 1.40 as US yields resume their rise

GBP/USD is trading around 1.3950 but off the highs. US bond yields have resumed their gains, boosting the dollar. The US ISM Manufacturing PMI and stimulus news are awaited. Markit's final UK Manufacturing PMI for February was revised up to 55.1 points.

GBP/USD News

Dogecoin on the verge of a 50% breakout

DOGE price is consolidating in a descending triangle pattern, hinting at a 50% breakout soon. It has slid below the support provided by the 50, 100, and 200 four-hour moving averages indicating a lack of buyers.

Read more

XAU/USD trims a part of intraday gains, bearish bias remains

Gold gained some positive traction on Monday, albeit lacked any follow-through buying. The set-up favours bearish traders and supports prospects for a further depreciating move. A sustained move beyond the $1772-73 region might prompt some short-covering bounce.

Gold news

US Dollar Index: Rally seen faltering near 91.60

DXY adds to the recent uptick and regain the key barrier at 9100 the figure at the beginning of the week.

US Dollar Index News

Forex Majors

Cryptocurrencies

Signatures