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Stocks fell sharply in Thursday’s New York session after bond “real,” or inflation-protected component of Treasury yields rose sharply. The inflation component of bond yields actually shrank a bit. The futures market for the US central bank’s overnight (federal funds) rate shows that investors expect that the Federal Reserve won’t raise interest rates until sometime in 2022. But that was enough to boost the yield on 5-year inflation-indexed Treasury notes by about 0.2% (20 basis points) and frighten the stock market.

The tech-heavy NASDAQ Index fell more than 3%, and the broad S&P 500 average fell by 2.6%.

Financial pundits compare the present situation to the “taper tantrum” of 2013, when the Federal Reserve announced that it would reduce, or “taper” its future purchases of government bonds (an attempt at stimulus that involved printing money to buy securities from the market). The S&P 500 fell about 6% during May and June of 2013 in response. 

But in this case, Fed Chair Jerome Powell has tried to reassure the market that he will not taper, at least not any time soon, and that investors can count on the Fed to keep buying $80 billion a month in Treasury securities. But the futures market for federal funds, the Federal Reserve’s overnight rate, shows that investors expect rates to go up in two or three years as the economy crawls out of the Covid-19 hole.

The bogeyman of the bond market, expected inflation, made no appearance in today’s events. So-called breakeven inflation (the difference between the yield on nominal Treasuries and inflation-indexed Treasuries) hasn’t changed at all in the past 10 days. This is a pure “real yield” effect, based on the market’s best guess of where the Federal Reserve will be two or three years from now.

As such, the impact is likely to be limited. The market can’t see that far, and the Fed is not going to give it any excuse to sell risk assets. 

There is a big difference between the “taper tantrum” of 2013 and today’s market, and that is valuation. The NASDAQ 100 traded in 2013 at just 15 times estimated earnings, compared to 30 times estimated earnings today. Of course, the alternatives to stocks in 2013 included 10-year Treasury notes that yielded 3%, compared to negative 0.5% in August (and 1.5% today). The bubbliest US tech names could be in for a nasty repricing, the broad stock market less so.