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Perhaps the big drop in Treasury yields over the past three months is really a modern version of the taper tantrum. 

That probably sounds odd, since back in 2013 the taper tantrum—a bond-market panic about the Federal Reserve cutting its Treasury purchases—prompted the exact opposite reaction, and 10-year yields soared from 1.6% in May of that year to above 3% by the end of December. 

But bear with me: What happened when the taper actually began was that yields dropped back, eventually falling all the way down to 1.6% again.

So here is a possibility: Investors have learned their lesson. The Fed is again readying the markets for the tapering of its bond purchases, but instead of a repeat of 2013’s tantrum, there has been a rush to buy bonds, and a big drop in yields.

If this sounds counterintuitive, don’t worry: Bond markets are weird. At its most basic, the 10-year yield is a measure of where investors think the Fed will set rates over the next 10 years, plus or minus an amount to reflect the risk of being wrong. The Fed buying bonds helps to reduce that risk premium, and so should, at least in the Fed’s theory, reduce yields, all else being equal. Tapering, therefore, should increase them.

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