During normal times in markets (remember them?), bond yields play an important roll in signaling investor sentiment. With unprecedented Federal Reserve intervention in bond markets, those signals are completely wiped out. Colby Smith and Tommy Stubbington report for the Financial Times:
When the Federal Reserve stepped in to support the world’s largest debt market in March, fixed income investors were relieved. But in successfully staving off a more pronounced financial crisis, the Fed has further distorted markets, they say, overwhelming the once-reliable signals that bonds used to give about the path of the economy and inflation.
Over the past two months, the Fed has snapped up roughly $1.5tn of Treasuries and another $600bn or so of agency mortgage-backed securities as part of its pledge to buy an unlimited quantity of government debt. According to JPMorgan, the total of the Fed’s bond-buying in just a handful of weeks is in line with what the Fed purchased during the nearly three-year period covering its second and third rounds of quantitative easing after the financial crisis.
The result is that no matter what the likely path of inflation, no matter how fierce or mild the threat to global economic health, bonds are going nowhere fast.
“There’s so much QE, it waters down your conviction on what the bond market is telling you,” said David Vickers, a multi-asset portfolio manager at Russell Investments.
For market participants, these muted signals have implications far beyond the Treasury market. Government bond yields in the US and other big economies reflect the return investors can expect to earn without taking risk, in the process serving as “the foundation on which you build every asset”, according to Rick Rieder, BlackRock’s chief investment officer of global fixed income. If Treasury yields are distorted, so too are prices for stocks, corporate bonds and just about everything else, some analysts argue.
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