Why the Fed’s bond buying program has led to pricey assets



With cash paying nothing and long-dated bonds barely keeping up with inflation, investors have bid up most asset classes in search of a decent return. However, according to Russ, there is one asset class that still looks cheap: volatility.

After six years of the Federal Reserve (the Fed)’s unprecedented experiment in unconventional monetary policy, nearly every asset class is starting to look pricey.

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Market Realist – The bond buying program has led to pricey assets

The graph above shows the Fed’s holdings since the start of 2009 and the pace at which the Fed purchased Treasuries (TLT)(IEF) of all maturities and mortgage-backed securities (or MBS). Due to the bond buying program that the Fed introduced as stimulus for the US economy, the Fed’s holdings have continued to rise. The quantitative easing (or QE) program ended last month.

The program had put downward pressure on Treasury yields due to demand and supply dynamics, which has helped keep interest rates low. Low interest rates helped boost the economy, which in turn supported US equities (SPY).

Also, the excess liquidity caused by the bond buying program helped risky assets like high yield bonds (HYG)(JNK) and emerging markets (EEM). Most asset classes are now appearing expensive as a result.

This series explains why volatility is a cheap asset currently.


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