How exactly has Federal Reserve policy over the last several years driven up interest rates? Please, give us a clear and precise explanation. We are anxious to understand how the Fed's $85 billion monthly purchase of bonds has driven up interest rates.
I said in my post that the Fed doesn't have much control over longer dated interest rates, not that they drive them up or down. But as a simple example, suppose you own a $100 10 yr bond paying 2% interest, but the cost of living is going up by 5% per year. You are then losing $3 per year on your investment, as you are getting $2, but there was $5 worth of inflation.
Now if you hold that bond to maturity, it doesn't matter, but if you sell it, you will take a loss on the face value, because the next buyer will want a higher rate of interest to compensate for the higher inflation. The Fed doesn't control what you would sell your bond for, but to the extent that the Fed prints too much money and runs up the cost of living, then bond buyers will also bid up interest rates.
And my comments have nothing to do with ACG, I've owned the stock for over 10 yrs, and bought some more back in the financial crash for under $7. Volatility in the pps is due to the long duration of the fund, and not related to its ability to pay its dividend.
There's clearly a problem with the "tapering" concept, apparently caused by the extreme
institutional leverage against low-yielding credits of all kinds. Witness the selloff caused by
Bernanke's timid "taper" remarks, quickly rescinded by various Fed talking heads.
Even so, the Fed now "owns" the banking/financial system and is unlikely to survive as
an institution should the huge bond bubble end in more institutional failures or near-failures.
IMO, that's why the tapering concept is in the air.
That said, Lacy Hunt, who's been right about the bond markets all along, believes
that the bond bull still has legs--that the "secular" (rate) lows have not yet been reached.
You can read his analysis at the Hoisington Investment Management site--in their
investor letter of Q2 2013.
I simply don't know, except to observe that the long decline in rates and the tradition of
Fed liquidity "accommodation" have certainly driven financial assets in general to
extremes. They are all dangerous at present, imo, particularly to the longer term
investor who's in the markets in lieu of cash savings.
Not planning to resume posting, but this situation's especially interesting.