Last week, as investors focused on the Bank of Japan’s surprise ratcheting up of quantitative easing, the US Federal Reserve’s own long-term asset purchase programme came to an end with barely a flicker of attention in terms of market movements.
The relatively quiet completion of ‘tapering’ was a far cry from the tumult of last summer’s ‘taper tantrum’ when bond markets reacted dramatically to Ben Bernanke’s testimony before the Joint Economic Committee in late May 2013. During the testimony, Bernanke reminded us that, as always intended, quantitative easing would be wound down if US data continued to indicate asset purchase programmes had achieved their goal of genuine economic improvement. This might sound logical enough, but bond markets were thrown into a panic amid talk of a re-run of 1994 (Eric Lonergan discussed some of our thoughts on that at the time).
If anticipation of tapering was enough to spur a sharp rise in yields in mainstream government bonds, surely the actuality of tapering would be extremely painful for bond investors? Well, actually, no. Since tapering began at the start of this year, yields on mainstream government bonds have fallen significantly and following the aggressive sell-off a few weeks ago, have now returned to pre-taper tantrum levels.
Now that US quantitative easing is over, reviewing its successes and failures in terms of actual measurable effects on economic conditions (the factors it is aimed at) is something that will no doubt be discussed across all kinds of forums for some time to come, and is not the intention of this post. However, it is interesting at this point to simply make the observation that market responses to policy moves, or even just the anticipation of policy moves, can be noisy, illogical and inconsistent across different time periods, depending on all manner of other factors (we could also point to the example of there being little impact at all on either the 30-year gilt market or the UK economy when the Bank of England ended QE in July 2012). Those who kept this in mind in constructing portfolios at the height of the taper tantrum, may have just been handsomely rewarded.
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.