Imagined Risks Vs. Real Risks
In fact, they found little increased inflation impact from such expansions. They also noted that the key to successfully implementing a policy of QE is, when the crisis has passed, for the Fed to promptly unwind its balance sheet.
That does mean extending maturities isn’t without risk. But if you recall, the pricing of that risk is embedded in today’s yield curve.
My crystal ball, as always, is cloudy. So I don’t know if or when the Fed will be able to successfully unwind its balance sheet at the right time. In other words, I know what I don’t know.
Forecasters either don’t know that they don’t know or they are getting paid a lot of money to pretend they do. With that said, we do know quantitative easing has occurred without triggering high inflation. We also know the Fed is well aware of the risks of failing to remove that stimulus in a timely fashion. The market reminds them of it on an almost daily basis.
Ignore The Noise
We also know that investors who have been scared by all the media attention, and thus altered their investment plans to avoid term risk, have paid a steep price for trying to dodge it. As always, the winning strategy is to ignore the noise of the market and stick to your well-developed financial plan, one that already incorporates the risks of unexpected inflation.
It’s important to keep these facts in mind as you consider what to do with your bond portfolio. Yes, it’s true that if the economy does eventually recover, bond yields will have to rise. But it was fear that the Fed might begin tapering off its QE program sooner and more quickly than previously thought that led to a sharp sell-off in bonds after Bernanke’s speech on June 19, 2013.
The yield on the 10-year Treasury has jumped from 2.20 percent to about 2.50 percent since then. The CBO’s “baseline” forecast assumes a slow but steady rise in 10-year Treasury rates—about a tenth of a percentage point per quarter, to an average of 4.1 percent for all of 2016.
Larry Swedroe is the director of research for the BAM Alliance, a community of more than 140 independent registered investment advisors throughout the country.