Bond buyer beware in choppy markets

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The last three months have seen some dramatic movements in the markets.  Following Ben Bernanke’s comments in June that the Fed would be reviewing its quantitative easing (QE) program with the view of easing the US$85 billion per month bond buying program, global markets sold off dramatically as investors switched out of ‘risk assets’.

Further to this, the Federal Open Market Committee (FOMC) minutes showed members were described as being “broadly comfortable” with Bernanke’s plan to start reducing bond buying later this year, if the economy improves. The latest public comments however, which came after the July FOMC meeting, have shown an increasing willingness to commence the taper as soon as September.

Taper me this

In response, large movements were seen in equity, currency and bond markets, the latter impacted by the realisation that a very larger buyer of bonds will no longer be there when QE is removed, therefore reducing demand. The market reaction was a fall in government bond prices and an increase in yields (given the inverse relationship between fixed rate government bonds and yields).

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