As anticipated, last Wednesday the Fed announced an end to its asset purchase program known as QE3, and while rates rose the same day, it is important to note several factors behind the move and keep a few things in perspective.
First, while rates did increase the same day the Fed announced an end to QE3, this announcement did not directly cause an increase in rates. Rather, many have indicated the increase we saw was just par for the course on the wild ride rates have been on since mid-October. The result being ‘corrective’ movement bringing rates more in line with what has been ‘normal’ in recent months.
Second, while some of the movement seems to have been corrective, overseas markets also had an important impact on rates last week. Ironically, while here in the U.S. we were announcing an end to our asset purchase program, Japan announced an increase in theirs. On Friday, Japan voted to increase their asset purchase program to 80 trillion Yen per year, or the equivalent of $720 billion. Comparatively speaking, and relative to the size of their economy, this is twice as aggressive as our QE program. Because Japan’s program also involves stock, we saw some volatility in the stock markets last week, the gains from which helped translate into higher rates.
Lastly, while we have seen an increase in rates it is important to keep in mind that all things considered, rates are still low relative to the past 16 months. It is also important to keep in mind it is still too early to determine what impact the end of QE3 will have on rates in the long term. Much of the movement we are likely to see in the near future will be the result of other factors, and this week will be no different.
As we gear up for the remainder of the week, we look to the European Central Bank on Thursday and the Employment Situation Report on Friday to drive trading; any big surprises will likely cause some volatility in the markets. Regardless of these events, we could see rates continue to rise depending on how far they have corrected themselves to this point from the mid-October lows. The result could be an indication of whether rates have actually moved lower or if recent lows have just been a fluke.
Most importantly, today is mid-term Election Day, so remember to get out and vote! A recent study reported a sad 39-42% of eligible voters vote on mid-term Election Day, compared to 65% of eligible voters who vote in a presidential election. While the issues and candidates being voted on today are generally more local in nature, it is still important to remember that every vote counts and many of the candidates and issues voted on today could have an impact on future national issues and elections.