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Impact of Fed and BoE on the Market

According to a study by Bank for International Settlements (BIS), large-scale bond purchases made by the U.S. Federal Reserve and the Bank of England made big impacts on the market.  The Fed has purchased $2.3 trillion worth of securities via Quantitative Easing (QE) programme: QE1 and QE2, and the Bank of England has set out to buy 275 billion pounds worth of bonds.

The study was by Jack Meaning of the University of Kent and Feng Zhu of BIS.  It found that:

  • On the US Markets
    • The initial programs had a greater market impact than the second programs.
    • The impact extended beyond the assets purchases.  For example, corporate bond yields rated Triple-B fell by 63 basis points in one day and nearly 100 in two days after the Fed’s first announcement of quantitative easing.
    • The first announcements also had big impacts on the U.S. dollar — down 7.7% over two days
    • Stock market volatility fell after the first U.S. action and the second
  • On the UK Markets
    • The first Bank of England announcement prompted declines in U.K. corporates with Triple-B ratings of 56 basis points the first day and 98 basis points in two days.
    • The British pound — down 3.7% after the first BoE announcement.
    • Stock market volatility showed no different after Bank of England’s move.
Bank for International Settlements

Bank for International Settlements (Photo credit: Wikipedia)

In addition to above, the followings were highlighted by the authors:

  1. The average and maximum yield effects of both QE1 and the Bank of England’s first bond buys were of roughly similar magnitude. But given that the Bank of England purchase represented 29% of the total number of U.K. government bonds, or gilts, and that the U.S. purchase was 4.7%, the Fed’s first bond buy was more effective. 
  2. Estimate that the Fed’s current Operation Twist program of selling $400 billion of longer-dated maturities it holds and replacing the securities with shorter maturities may have an impact of 22 basis points for maturities over eight years but lift three-month to three-year maturities by around 60 basis points.  The Fed isn’t expecting a big impact on short-term yields from the Twist program, which the authors conclude is a product of the central bank’s pledge to keep rates at exceptionally low levels through the middle of 2013.
  3. As the government bond yields are already very low;  that the surprise element is lacking; and that the programs risk impacting inflation expectations, the authors point out limitations to further quantitative easing programs.

Reference:  MarketWatch, 2011-12-11, “Fed, BoE bond buys moved markets, study finds”