Wall Street’s conventional wisdom about bonds may be completely wrong
When the Fed brings down its crisis-era debt investments, US treasury yields have to up, right? Not if you factor in the unwinding of quantitative easing
New York — On Wall Street, the conventional wisdom is that once the Federal Reserve finally starts to whittle down its crisis-era debt investments, US treasury yields will have nowhere to go but up. But to some bond investors, history suggests the consensus couldn’t be more wrong. During each of the Fed’s quantitative-easing (QE) cycles, yields rose when the central bank was buying and fell when it stopped. This ran counter to what many expected based on simple supply and demand as the Fed amassed $4.5-trillion of debt and became the single biggest holder of treasuries. The lesson, investors say, is that what really matters to the bond market isn’t so much what the Fed is doing, but what the policy changes mean for the US economy in the months and years ahead. In the case of QE, the Fed’s stimulus brightened the outlook for growth and inflation, while the periods in between refocused investors on the mediocre state of the post-crisis economy. Now, as the Fed embarks on its long-awai...
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