Policymakers have begun their two-day meeting in Washington. Among calendar items, the Federal Reserve will discuss the plan to begin tapering its $85 billion a month bond buyback program which was created to fuel growth and employment.
Fed Chairman Ben Bernanke said the quantitative easing program, also known as QE2, is likely to end in the middle of next year, but John Donaldson, director of fixed income at Haverford Quality Investing, thinks it may take longer.
Donaldson expects the Fed to begin tapering by $10 billion per month without much market impact. He said this past week was very good for the bond market. “Verizon deal was hugely successful, Treasury had good 3- and 30-year auctions and a very good 10-year auction. If the market can absorb all that supply, it can certainly handle a taper,” said Donaldson.
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As for finding value in the market, Donaldson said investors should be wary of risks in the bond market, especially long-term Treasuries. According to Donaldson, if rates rise to 4 percent over the next six months, 10-year bonds purchased during the past year could lose up to 17 percent of their principal value.
As of May 1 through last week, intermediate Treasuries lost 2.57 percent of total return, while seven- to 10-year Treasuries lost 8 percent of total returns and long Treasuries lost 14 percent of total return, said Donaldson.
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