Global Macro

What Happened Last Time Global Yields Surged?

Volatility has returned to financial markets over the past week as comments from policy makers has renewed uncertainty over the future path of monetary policy. There’s been a lot of speculation that both the European Central Bank and Bank of Japan are reconsidering or changing their quantitative easing programs. There’s also a lot of uncertainty around the timing and speed of future interest rate hikes by the Fed.

All this uncertainty reminds me of the conditions during the “taper tantrum” of 2013, where Federal Reserve Chairman Ben Bernanke said that the Fed was planning on tapering its bond purchases later in the year, conditional on the data. This led to a dramatic increase in global yields with the U.S. 10-year going from around 1.6% in May 2013 to 3.0% by the end of the year. It seems like many other investors are thinking the same thing, as evidenced by these news articles I pulled today.


Over the past two weeks, we’ve already seen a sharp increase in global yields caused by announcements from central banks, so current conditions are playing out very similarly to the taper tantrum. This prompted me to think of the best way to position a portfolio in case a similar increase in global yields occurs. I decided to use my data set of 1,900 ETFs to see which asset classes performed best. Interested readers can take a look at my previous post to learn more about this data set.

Research Methodology

Starting with a collection of 1,928 ETFs, I first filtered the list down to the largest ETF ranked by assets under management for each market segment. I also removed any leveraged or inverse ETFs. This left me with a list of 342 ETFs.

I then calculated the total return of each ETF from May 2013 to December 2013 (what I’ve defined as the dates of the taper tantrum). I also calculated the correlation between the daily returns of each ETF and the daily change in the U.S. 10-year bond yield.

Finally, I examined ETFs with positive or negative correlation in combination with a high or low return. I looked at correlation because I wanted to identify ETFs where the relationship between the ETF and change in bond yields was strong. There were plenty of examples of isolated pockets of securities that did well or poorly during the taper tantrum but largely for reasons unrelated to the change in bond yields. For example, renewable energy and internet stocks did extremely well in 2013 but have low correlation to changes in bond yields.

Assets that Performed Poorly

The assets that performed poorly are identified by ETFs with both a large negative return and negative correlation to changes in the U.S. 10-year. The interpretation is that these ETFs went down a lot on the same days that the U.S. 10-year went up a lot. Here are some of my findings:

ETFs focused on long-term bonds performed the worst. This is unsurprising since bond yields are mathematically linked to bond prices. Somewhat less surprising is that all types of bond ETFs did poorly, including sovereign, inflation-linked, high-yield, corporate, and municipal. All geographies did poorly, including U.S., other developed markets, and emerging markets.

U.S. REITs did poorly also as the 30-year mortgage rate increased in concert with global yields.

Precious metals and gold in particular did poorly as fixed income assets became more attractive.

Emerging market equities did poorly as investors began to rethink their allocation to higher yielding and riskier assets.


Here is the same data in table form along with the market segment and total return of each ETF:

Ticker Segment Return Correlation
1 VGLT Fixed Income: U.S. Government Long-Term -0.15 -0.92
2 BLV Fixed Income: U.S. – Government/Credit Investment Grade Long-Term -0.11 -0.91
3 TLT Fixed Income: U.S. Government Treasury Long-Term -0.16 -0.89
4 LTPZ Fixed Income: U.S. Government TIPS Long-Term -0.20 -0.86
5 REM Equity: U.S. Mortgages -0.17 -0.62
6 ILB Fixed Income: Global – Sovereign Inflation-Protected -0.13 -0.60
7 ELD Fixed Income: Emerging Markets – Broad Market -0.12 -0.52
8 MLN Fixed Income: U.S. – Municipals Investment Grade Long-Term -0.11 -0.49
9 AUNZ Fixed Income: Australia and New Zealand – Sovereign Intermediate -0.13 -0.42
10 XMPT Fixed Income: U.S. – Municipals -0.14 -0.42
11 VNQ Equity: U.S. Real Estate -0.11 -0.41
12 HYD Fixed Income: U.S. – Municipals High Yield -0.11 -0.37
13 GLD Commodities: Precious Metals Gold -0.18 -0.35
14 BRF Equity: Brazil – Small Cap -0.24 -0.34
15 FLN Equity: Latin America – Total Market -0.12 -0.34

Assets that Performed Well

The assets that performed well are identified by ETFs with both a large positive return and positive correlation to changes in the U.S. 10-year. Here are some of my findings:

There were lots of assets with high return during the taper tantrum but ultimately had very little correlation to changes in the U.S. 10-year yield, which suggests that other confounding factors explain their performance. In particular, developed world equities all did well in 2013 but not because of the taper tantrum.

The only pattern I see in the data is that U.S. financials and banks performed well as the yield curve steepened. During the taper tantrum, short-term interest rates largely remained anchored while long-term interest rates increased. A steeper yield curve helps bank profitability.


Here is the same data in table form along with the market segment and total return of each ETF:

Ticker Segment Return Correlation
1 EWJ Equity: Japan – Total Market 0.06 0.05
2 FDN Equity: U.S. Internet 0.39 0.05
3 PJP Equity: U.S. Pharmaceuticals 0.34 0.05
4 IGM Equity: North America Technology 0.25 0.05
5 SMH Equity: Global Semiconductors 0.17 0.05
6 IEZ Equity: U.S. Oil & Gas Equipment & Services 0.17 0.05
7 PEJ Equity: U.S. Leisure & Recreation 0.26 0.05
8 XLF Equity: U.S. Financials 0.20 0.06
9 IHF Equity: U.S. Health Care Providers & Services 0.19 0.06
10 XOP Equity: U.S. Oil & Gas Exploration & Production 0.23 0.07
11 IYT Equity: U.S. Transportation 0.24 0.07
12 SOXX Equity: U.S. Semiconductors 0.23 0.08
13 FCG Equity: U.S. Natural Gas 0.23 0.10
14 LEDD Commodities: Industrial Metals Lead 0.09 0.14
15 IYG Equity: U.S. Financial Services 0.28 0.15
16 KBE Equity: U.S. Banks 0.29 0.21
17 IAI Equity: U.S. Banking and Investment Services 0.43 0.23

Lessons from the Taper Tantrum

One of the key insights I got from doing this piece of analysis is that there aren’t many pure long-only bets you can make to profit from increases in global yields with the exception of going long U.S. banks and financials. Most of the good opportunities are on the short side.

To summarize, here are my recommendations to implement the market view that long-term interest rates will increase rapidly. Note that I’m not really offering an opinion on the likelihood that interest rates will increase, but I do think the potential exists, and I want to be prepared to implement this market view if necessary. Interested readers can take a look at my framework for choosing ETFs to find out why I chose these particular ETFs.

Short long-term U.S. sovereign bonds (VGLT, TLT).

Short the U.S. real estate market (REM, VNQ).

Short gold (GLD). 

Long U.S. banks and financials (IYG, KBE, IAI). 

Flat U.S. and developed world equities. 

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I am interested in building investing systems, and this blog contains my research and analysis on this topic. I previously worked as an analyst at Bridgewater Associates, a hedge fund that utilizes a systematic, global macro investing style.

1 comment on “What Happened Last Time Global Yields Surged?

  1. Lessens may be a spelling mistake?

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