All major central banks – the Fed, ECB, and BoJ – bought bonds since 2008, creating tremendous influx of liquidity (see chart). This kept interest rates low, and boosted the global economy through low borrowing costs for consumers and businesses.
The Federal Reserve ended its bond-buying quantitative easing (QE) stimulus in October 2014. At the same time, the Bank of Japan boosted debt buying to 80 trillion yen ($714 billion) a year, from 60-70 trillion previously. And the ECB implemented its QE program in early 2015 to cope with Europe’s faltering economies and deflation.
This should help keep long-term interest rates reasonably low. The only thing that can upset these plans is if inflation rises – but inflation is still below central banks’ targets. It means that an abundance of liquidity will continue to support asset prices. For tactical investment management, we want to be in assets with the best near-term expected risk-return.
Chart sources: Model Capital Management LLC, with data from Economagic. Note: amounts are in local currencies, and are not to scale.
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