The unwinding of quantitative easing (QE) is likely to ‘completely miss the mark’ in terms of people’s expectations, according to Nikko AM fixed income manager Chris Rands, as the market fails to understand supply and demand dynamics.
He said the end of QE, a form of money printing, in the US in 2014 and the UK in 2018 had shown bond yields falling by as much as 100 basis points rather than rising as they would be expected to do.
Traditionally, when QE is introduced then bond yields rally as there is a new source of demand and when it ends the bond yields sell off as the buyer exits the market.
“As we enter a period where QE is starting to be unwound, we have seen the expectations of how this will unfold completely miss the mark,” Rands said.
“Indeed, when it comes to interest rates, quantitative tightening is having the opposite effect to what was predicted.”
He said either central bankers at the Federal Reserve and European Central Bank had ‘unlucky timing’ when they ended QE or that the world had failed to understand how QE worked and could cause more harm to economic conditions.
“Given the consistency in the changes to global export volumes and the consistent decline in bond yields, it is becoming far more likely that we should believe conclusion number two, that we don’t quite understand the true effects of QE, rather than conclusion number one — that central banks have been the victim of unlucky timing,” Rands said.
“If true, this means investors need to think longer about how unconventional monetary policy can affect asset prices, as the bond environment shows that just expecting yields to go higher because there will be more sellers can be incorrect.”