QE: How Tapering will Affect Bonds

Corporate bonds will struggle over the next month as investors attempt to anticipate the timing of the Federal Reserve tapering QE

Dave Sekera, CFA 27 August, 2013 | 12:15PM
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In May, we said that as soon the Fed intimated to the markets that it would begin tapering its quantitative easing program, interest rates would rise by 100-150 basis points. In the Federal Open Market Committee's May statement, it added the following new language: "The committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes."

This provided the market with its first hint that the FOMC was contemplating reducing its asset-purchase (QE) program, precipitating the recent rise in interest rates.

Later in the month, in response to questioning from the Joint Economic Committee, Federal Reserve chairman Ben Bernanke was more specific, saying the FOMC could begin reducing asset purchases as soon as a few meetings from May. Soon thereafter, the FOMC released the minutes from the April 30-May 1 meetings. These minutes highlighted the fact that a number of members believed the current asset-purchase program should have been decreased as early as the June meeting (with one participant recommending beginning decreasing purchases immediately).

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Dave Sekera, CFA  is a senior securities analyst with Morningstar.