As volatility returns to markets, there is growing anticipation regarding the end of quantitative easing (QE) in the US, with some analysts predicting it could start as early as this summer.
The first round of QE began in 2009 after the Federal Reserve started buying $500bn in mortgage-backed securities (MBS) and $100bn of government-sponsored enterprises to promote stronger growth in America after the financial crisis of 2008. QE2 began in November 2010 and QE3 began on 13 September 2012 - in an 11-to-1 vote, the Fed decided to launch a $40bn a month programme of open-ended bond purchasing of MBS.
Analysts and economists have been predicting when the Fed will start tapering QE and the effects it may have.
Manager of the BlackRock UK Income fund, Adam Avigdori, said the potential tapering of QE in the US will be an “interesting period” for markets.
“QE has helped avoid disaster in the UK, Europe and the US,” he said. “QE in some form will be around for longer than many think, although the markets will worry about it continuously and remain volatile.”
M&G’s Richard Woolnough, manager of several of the group’s bond funds, said, “Given the jittery moves in the markets on the talk of tapering QE, Mr Bernanke needs to decide how to wind down the party he has generously hosted, with minimum damage.”
The situation in the US brings to light a potential issue for when the UK decides to rein in its own QE programme. The Graph shows exactly how QE has played its part on the 10-year treasury yields in the US when the different rounds began.
Speculation that the Fed will taper QE has been playing a big part in treasury yields. The 10-year US treasury yield rose from 1.66 per cent on 1 May to 2.16 per cent by 31 May this year.
