Taper tantrum: what it means and how it affects you

Yes: these two strange words affect him. And probably a lot more than you might think. Not all Spaniards have a variable income fund, but the vast majority of those who save have a fixed income fund or pension plan. Y

But, let us start at the beginning. The phrase taper tantrum refers to the denomination given by the financial media to the moment in which the Federal Reserve of the United States announced that it would reduce the purchases of bonds, which it had been carrying out to inject money into the economy to take it out. from the collapse of the 2008 crisis.

The announcement was made by the one who was president in 2013, Ben Bernanke, and he did it with quite a little left hand, because, instead of launching small trial balloons beforehand, he released it like this, for good, in an appearance or in a conference press, I don’t remember very well.

Imagine: if the equivalent of Big Brother in the bond markets, in this case “The Big Buyer” – the Fed – announces that it is going to buy fewer bonds, the price of the bonds obviously falls. And with them the value of fixed-income funds and pension plans that invest in bonds. And if in addition

And why do I say that if you have investment funds or fixed-income pension plans, it affects you? Well, because if the economy now returns to normal as the pandemic is overcome, the logical thing is that even if they now deny it – they have already learned – it is only a matter of time before the central banks reduce the purchases they made to avoid collapse. And, as the markets anticipate future events, there are many who already “just in case”.

Things could be worse if the fear that inflation will pick up is also confirmed. The reasoning is similar: how logical it is for inflation to rise, even if it is not much. The problem is that even little is too much for the bond market.

A rise in inflation will increase the impact on fixed income funds in the long term

The result of years of bond purchases by the central banks has meant that their interest rates are no longer on the ground but in the subsoil, that is, they are zero, zero point or negative. In fact there are still trillions of dollars in bonds with negative interest rates, which is said soon.

Well, imagine that you have a -it costs you money to have it-, zero or zero point and that inflation goes and rises to 2%, for example, which is not something from another world either. Their bonds become worth much less, because they give a very low coupon when compared to inflation. To avoid finding themselves in that situation, those who have those bonds are already starting to sell them. That is why fixed income funds have been losing value for a couple of months. But those sales are just the tip of the iceberg. Most investors, including many large pension funds and insurance companies, continue to believe that the Fed will continue to buy bonds wildly and keep rates low and prices high.

So far the bad news. The good news is that this does not apply to all fixed income funds. You will have seen that I have paid special attention to clarifying that these are medium and long-term fixed income funds. If they hurry me, I would tell them that the damage would be focused on the long term. So my advice is to review your fund portfolio or seek the opinion of an independent adviser and see if your fixed income funds are among those that could suffer in this scenario.

Another good news is that there are moderately profitable and moderately risky alternatives. The third piece of good news is that there will be geographical areas that, due to their tendency to grow less than the average, would cause a smaller rise in inflation. And the fourth is that, being as we are still in the middle of the digital revolution, talking about an upturn in inflation is correct. The digital economy is very competitive and makes it difficult for us to enter a strong inflationary spiral (at least for now). Even so, my advice is that you do not stop reviewing your portfolio of fixed income funds.

You are probably wondering what the consequence might be for equity funds. Indeed, the taper tantrum would have them, but, in my opinion, they would be different. The problem is that here we no longer have space to explain them, so we leave it for another occasion.