The US Federal Reserve has articulated its stance of tapering its bond purchases next year. This is likely to result in a rise in the 10- year bond yield in the US, which is viewed as the risk free rate.

A taper is also likely to drive up the US dollar as its liquidity fades. When that materialises, local interbank rates could firm, which in turn would cause yields on the 10-year Singapore Government Securities (SGS) to firm.

The 10-year SGS yield is the local risk-free rate. REITs are priced off risk-free rates, through a yield spread. When risk-free rates rise, REIT yields tend to rise as well, causing REIT unit prices to fall. That, in a nutshell, is what happens to REITs during a taper tantrum.

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