Treasuries Could Gain, Not Lose, From End Of Fed’s Bond-Buying Program

Monday, May 09, 2011 05:52
Treasuries Could Gain, Not Lose, From End Of Fed’s Bond-Buying Program

Tags: bonds

Most advisors have clients betting against bonds, but that could be a mistake, say analysts who believe the end of quantitative easing may actually boost the bond market.

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The bond market has rallied in recent weak largely based on weak economic data. If economic growth continues to slow, inflation risks will ease and commodity prices will fall, making bonds more attractive.

The Fed’s actions to boost the economy have been cited as one factor in the run-up in stock and commodities prices, and when that activity ends investors could flee those sectors and return to the bond market. Bond yields rose and prices fell after the start of QE2 in November because investors expected the move to bolster economic growth and prospects for inflation.

"As a bond investor, I want a hawkish central banker because he's protecting my cash flows,” Russ Certo, co-head of rate trading at Gleacher & Co., told the Wall Street Journal. “QE2 was not good for Treasurys.”

Of course, many bond experts have argued there will not be enough new buyers to step in and replace the Fed’s bond-buying power, leading many investors to bet Treasury prices will fall again.

Comments (1)

But, this assumes the Fed ends QE. If the economy is still struggling to get out of first gear, my bet is the Fed keeps the pedal to the metal. Especially if the employment picture doesn't improve. Remember, the Fed wants and needs inflation in order for economic expansion. So, they will continue to push QE to that end. It seems a no brainer that inflation rears it's ugly head in 2012/13.
davidc0128 , May 09, 2011

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