Fed talks affecting bond market ‘not a bad thing’

Quantitative easing (QE) has remained one of the industry’s most spoken about topics over the past few months. Rumours the US Federal Reserve was going to start tapering its QE programme began in June, with some analysts predicting it would happen sooner rather than later.

Minutes from the central bank in July showed roughly half of the members of the Fed’s Open Market Committee supported Fed chief Ben Bernanke in scaling back the bank’s purchases before the end of the year.

After the minutes were released, the dollar fell against the pound, euro and yen, with some analysts suggesting the Fed has been playing the markets. US 10-year government bond yields jumped from 2.50 per cent on 4 July to 2.74 per cent on 5 July. It later slumped to 2.46 per cent on 22 July.

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Phil Milburn, co-manager of the Kames Capital Strategic Bond fund, said the Fed talks affecting bonds is not necessarily a bad thing. “Is it positive that bond yields are high? In the greater scheme of things, yes,” he added.

“I think all the Fed is trying to do, in theory, is to guide on future monetary policy. In practice, I think historically the Fed had the dual mandate of inflation and economy economic activity. I think now a lot of its third mandate is of financial stability as well,” he added.

But will the US movements trigger similar events in the UK? Policymakers behind Mark Carney, the new Bank of England governor, voted unanimously in a 9-0 against extending the UK’s QE following his appointment

“Mr Carney is inheriting the Bank with a little bit of momentum,” Mr Milburn said. “While he’s not trying to stamp on that, to keep monetary policy loose, he is going down a different route for QE.

“But should the US QE programme necessarily affect the UK bond market? Not massively in theory, no. But, in reality it always does. The US treasury market leads all global bond markets.”