The announcements from the Federal Reserve and the Bank of Japan last week couldn’t have been more different. The Fed, citing a growing economy, improving employment and stable inflation, announced an end to their third round of bond purchases known as quantitative easing. While the Fed will continue reinvesting principal and interest payments, the overall size of its balance sheet will remain stable as opposed to expanding each month. The Bank of Japan on the other hand, citing a lack of inflation, surprised financial markets by increasing the size of their quantitative easing program by one-third, thereby expanding what was already a very large asset purchase program. In addition, the Government Pension Investment Fund announced it will be reallocating 10% of its portfolio allocation to Japanese equities. Both moves aim to increase economic activity, and with it, inflation. We mentioned in our 3rd quarter market commentary that continued easy monetary policies around the world would likely keep a lid on Treasury yields, despite a Fed that is slowly becoming more hawkish. While this doesn't mean that the U.S. rates will remain at the current low levels, its unlikely that the "bond market bubble" so many bond bears talk about is going to "pop" anytime soon.
Source: Wall Street Journal