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Of all the markets in the world that are being affected by the policy of quantitative easing (QE) tapering, the bond markets are the most affected. This is because the policy rules mandate that the primary investments being made by the government as a result of the money created must be in the bond markets.
As a result, a massive amount of money is entering and leaving the bond market based on the changes in this policy.
In this article, we will have a closer look at the effects of both quantitative easing (QE) as well as quantitative easing (QE) tapering on the bond market.
Quantitative easing (QE) has many effects on the market. The foremost ones which have the highest impact have been listed in this article.
Hence, the banks are in effect creating new money and pumping it into the system. Therefore, the demand for bonds that absorb this newly created money is bound to rise. It is for this reason that the quantitative easing (QE) money is used to buy only government bonds ensuring that no private parties make any profits as a result of this government policy.
The US government is thus said to be having an easier time financing its $2 billion per day debt requirement, thanks to the quantitative easing (QE) policy that it has introduced.
Hence, the governments have to issue more bonds and banks have to print more money to keep the system running. As such, the true financing costs of the bonds are hidden. This is because when a lot of buyers chase a limited amount of bonds, the yield of the bonds remains less. The governments can afford to give less interest and still sell their bonds because of the increased competition amongst investors.
Ideally the bond market is supposed to move based on the fundamentals which are dictated by interest rate changes. Interest rate changes are small and do not move much overnight. Hence, bond markets were once considered safe havens for investments. Debt investments would make smaller but fixed returns.
However, in the recent past, the bond market is being driven single handedly by expectations regarding the quantitative easing (QE) policy.
The interest rates have literally taken a backseat wherein quantitative easing (QE) is running the show. Now, the quantitative easing (QE) policy is highly unpredictable. As a result, the bond markets fluctuate wildly before any major announcements by the Fed, European Central Bank (ECB) or any other authority.
Like quantitative easing (QE), quantitative easing (QE) tapering also has many effects on the market. Some of the major effects of quantitative easing (QE) tapering are as follows:
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