In with the new: The Fed passes the monetary easing baton to Japan

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Off with the old and in with the new: The Fed passes the monetary easing baton to the Bank of Japan

On October 29, the U.S. Federal Reserve made its long-anticipated announcement that it was ending its monthly bond purchase program, popularly known as “quantitative easing (or QE3).” QE3 resulted in the Fed purchasing $1.7 trillion in longer-term Treasuries and mortgage-backed securities since October 2012. This was an unprecedented level of liquidity injection in U.S. financial markets. The higher liquidity had benefited stock and bond markets both in the U.S. and abroad.

Within a couple of days of the Fed’s announcement, the Bank of Japan announced an expansion to its monetary stimulus program on October 31.

Part 1

In this series…

You’ll read about the impact of the Fed’s QE3 exit on the high-yield debt and leveraged loan markets. You’ll also read about the current trends in the primary and secondary markets in junk bonds and leveraged loans.

Junk bonds see positive returns in October

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Despite the volatility spikes (VXX) in mid-October, high-yield bonds are back in vogue with investors. Market activity in both the primary and secondary markets for junk-rated debt rebounded over the past couple of weeks. Markets also priced in lower risks for junk bonds. We’ll discuss these themes in greater detail in parts 4 and 5 of this series.

The prices of junk bond ETFs like the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and the SPDR Barclays Capital High Yield Bond ETF (JNK) rose in October. HYG and JNK were up by 1.1% and 0.9%, respectively, in October. In comparison, the iShares Russell 2000 (IWM), the SPDR S&P 500 ETF (SPY), and the PowerShares Senior Loan ETF (BKLN) increased by 6.6%, 2.4%, and 0.8%, respectively.

The next part of this series examines the impact of these developments on the primary market for high yield debt.

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