17 Jun Taper Tantrum… TBT
Let’s take a trip back to #Summer2k13. We had the Harlem Shake, selfie was the word of the year, and T-Bills and MBS were being thrown around like a rag doll.
The Need to Know:
After the 2008 crash, the US economy was in a horrible place. Unemployment was at all time highs, thousands of businesses across the country were shutting their doors and the housing market was… pretty much the opposite as the past year in every way. So, the Fed decided to implement QE (quantitative easing) to stimulate the market and increase business spending. (QE is essentially the Fed slamming a shot of adrenaline into the chest of the economy) The Fed was buying up T bills and MBS to help provide some liquidity to the market and decrease rates. And it worked – really, really well. By 2013 the market was starting to stand on its own and the Fed though that it was time to start tapering down their investments and let the baby bird fly. So, they made an announcement that they would decrease QE spending at some time in the future. It’s important to know that they didn’t actually decrease spending… just said they planned to at some point. This caused absolute pandemonium in the T-Bill and MBS markets. Mortgage Backed securities plummeted and mortgage rates did the opposite. This sent a shock wave of fear through the market and investors pulled their money out. This panic is known as the Taper Tantrum.
TBT (Throw Back Thursday):
Today the economy looks eerily familiar. The Fed has been pumping trillions of dollars in through MBS investments as well as other securities for over a year. That investment led to the housing market boom and pushed the longest stock market bull run on another year to record highs.
Then yesterday, the Fed announced that they will start tapering investments in 2023, earlier than most thought. Immediately, MBS pricing dropped over 50 points and the Fed meeting is the biggest topic across the market. We do not know exactly what to expect but were having a bit of déjà vu. We can only hope that the market does not panic like it did in 2013.
MBS pricing is up 11 points from yesterdays plunge. We could see a bounce in the market and see that investors learned their lesson 8 years ago or they could continue to sell off. We are now in the middle of a wide trading range with a strong floor. We are carefully floating in hopes for a bounce but will lock if we start to touch the floor.