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Infinite QE Is Destroying Traditional Bond-Fund Strategies

edited March 27 in Fund Discussions
Interesting reading. Themes include low interest rates for now, inflation possible down the road, cash is king, and lack of clear historical context for current situation.
Core tenets such as what constitutes a safe asset, the value of bonds as a portfolio hedge, and expectations for returns over the next decade are all being reconsidered as governments and central banks strive to avert a global depression.

QE Kills Valuation Models -- Ordinarily, the prospect of a multi-trillion-dollar government spending surge globally ought to send borrowing costs soaring. But central bank purchases are now reshaping rates markets -- emulating the Bank of Japan’s yield-curve control policy starting in 2016 -- and quashing these latest volatility spikes.

Inflation Risk -- Many market veterans agree that faster inflation may return in a recovery awash with stimulus that central banks and governments may find tough to withdraw...“There’s tension in all of this,” said Hamish Pepper, fixed-income and currency strategist at Harbour Asset Management Ltd. in Wellington, New Zealand. “I don’t think it’s necessarily about waking up one morning realizing that bond yields should be 100 basis points higher from here -- but you have to think about inflation at some point.”

Haven or Not? -- “Will government bonds play the same role in your portfolio going forward as they have in the past?” he said. “To me the answer is no they don’t -- I’d rather own cash.”

“It’s very hard to look at this in a historical context and then apply an investment framework around it,” said BlackRock’s Thiel. “The most applicable period is right before America entered WW2, when you had gigantic stimulus to spur the war effort. I mean, Ford made bombers in WW2 and now they’re making ventilators in 2020.”


  • Thank you for the interesting link.
  • Yeah, I've been thinking same thing. Talk about potential for price dislocation. How does the market know what the true demand is when the Fed/Treasury is buying everything up? Maybe the Fed is just betting that demand and attendant liquidity will return to normal when folks don't feel the world is ending. It's that or let everything freeze-up now, which certainly would be catastrophic! Mutual funds, especially in fixed income, are everybody's retirement account and simply too big to fail ... those deemed investment grade anyway.
  • edited March 27
    My head shook when the Fed undertook massive QE during the Great Recession. I was surprised to see the markets full embrace of it. But the Don't Fight The Fed logic prevailed. I have gradually accepted the notion that there is no turning the clock back and that the Feds intervention in the economy will likely increase through time as they continue to implement their dual mandates. (The Powell Put of February 2019 reinforced this acceptance.) Perhaps "true demand" estimates just need to incorporate a BIG AND INCREASING Fed factor.
  • >> “The most applicable period is right before America entered WW2, when you had gigantic stimulus to spur the war effort."

    Thiel is in his early 50s and has a Princeton degree in Am history, it says, but I think the above may be seriously misphrased.
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