Quantitative easing has meant a lot of things to a lot of people. For some, the Federal Reserve’s decision to purchase U.S. treasury bonds with electronically-created dollars saved the world from total financial collapse. For others, “QE1″ may have stimulated the environment for businesses and banks to operate on short-term credit again. Still others view “QE1″ and “QE2″ as little more than inflation-creating, dollar devaluing schemes with dire long-term consequences.
It’d be foolish to label the Federal Reserve’s efforts as entirely successful or entirely unsuccessful. For instance, the initial talk about a second program for buying treasury bonds (QE2) during the summertime’s economic “slow patch” went a long way to reflating stock and commodity prices. On the other hand, 10-year treasury yields have soared nearly 100 basis points since the actual November QE2 announcement; many commentators point to this reality to argue that QE2 did not maintain ultra-accommodative yields, but rather, made things worse.
A final verdict, if one is ever rendered, will likely depend on whether employment or core inflation picks up first. They may go hand in hand, but the Fed is probably hoping for employment to gain ground at a fast enough clip that rates can be raised to deal with the accompanying inflation. If core inflation picks up dramatically, but employment doesn’t improve, the bond purchasing programs will get more than a lion’s share of the blame.
Why have I re-opened the QE can of worms? Isn’t that yesterday’s story? Perhaps not.
Consider the fact that high finance is, at its heart, a confidence game. For example, the Fed’s imminent decisions on interest rates are typically less important to the markets than the central bank’s “statements” regarding the future direction of monetary policy… many months out. And if the Fed perceives a future that is bright… but not too bright… we tend to have more confidence that investments made today will appreciate in value.
It’s the Fed’s statements that have particular sway over future market direction. In fact, it was the Fed’s summertime statements about providing more help to the economy via bond purchases that likely propelled stocks to phenomenal gains in September and October.
Similarly, the “Bond King” of PIMCO, Bill Gross, famously said in October that the QE2 bond purchases will probably signify the end of the 30-year rally in bonds. Wow! The end of an era! And like clockwork, bond yields on everything from treasuries to corporates to munis surged higher.
So was Bill Gross right? Or did the coverage of his dramatic statement lead scores of investors to dump their bond holdings?
But the “Bill Gross effect” hardly ends there. With bonds getting crushed by a mass exodus in November and the first few weeks of December, Bill Gross didn’t join the stampede. Instead, he bought $17 million worth of closed-end bond funds with his own money between December 13 and December 14. On December 17, he was at it again, buying another $9 million in Pimco Corporate Opportunity (PTY), Pimco Corporate Income (PCN) and Pimco High Income (PHK).
So let’s revisit the timeline. When the Fed spoke about buying bonds in the summertime, investors held onto their bonds and they began showing some confidence to buy stocks. In October, BIll Gross spoke about the end of the bull market for bonds, implicitly and explicitly giving investors a reason to sell bonds and buy stocks. In November and December, the Fed reiterates that it will still be buying bonds per QE2; investors see the ultra-loose monetary policy as a reason to buy more equities.
And now Bill Gross joins the Fed in bond repurchasing, though it is primarily concentrated in higher-yielding corporate debt. Wouldn’t that suggest that Mr. Gross still sees value in debt? Wouldn’t it suggest that he sees bonds as “oversold?” Wouldn’t it mean that the end of a 30-year bond bull doesn’t mean the beginning of a 30-year bond bear?
While it’s possible that Mr. Gross is merely looking to instill some confidence with symbolic Pimco purchases, it’s equally likely that Big Bad Bill sees something sweet in junk bonds. If you’re intrigued by Mr. Gross acquiring shares of closed-end funds like Pimco Corporate Opportunity (PTY) and Pimco Corporate Income (PCN), you might want to revisit ETFs like iShares iBoxx Corporate High Yield (HYG) and SPDR Barclays High Yield (JNK).
Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.