Quantitative Easing Has Ended, What’s The Effect On Bonds?Author: Adam AloisiLast Updated: December 30, 2019 Following many years of extraordinary, stimulative economic policy, the Fed has announced an end to Quantitative Easing. Since sending a shockwave through financial markets nearly 18 months ago with its intent to taper its bond buying program, central bankers have carefully orchestrated a slow, calculated abatement of QE this year.With sights set on a more normalized rate policy, investors continue to speculate when the the Fed may decide to tighten (raise) short-term rates. Many pundits seem to think that a move could come as early as Spring of next year, while others feel the Fed may be dovish until 2016.The Fed will be watching for any lagging indication that QE terminus is having a deleterious effect on the economy. With the unabated moves this year, however, and lack of indication that the taper was posing specific problems for the economy, there doesn’t appear reason to believe that there will be a rush move back into stimulus.So the question that fixed-income as well as equity investors must ask themselves is what this all means going forward. If you take the view that the economy is self-sustaining, robust, and growing, this could well be a bad time to be buying bonds – especially long-term ones. If the Fed is forced to become vigilant on economic growth through rate hikes, this generally decreases the value of bonds purchased prior to tightening moves. Should the Fed engage in an incremental and prolonged tightening spree, it could represent substantial opportunity cost to those holding longer duration bonds.Personally, I don’t expect such a scenario. While I would not bet against a hawkish move by policymakers next year, I do not believe economic fundamentals are such to justify a dramatic move up in rates. While the housing market seems to have stabilized, we are still dealing with financial crisis excesses. More expensive money would jeopardize a housing recovery. If we look at data concerning wages, household net worth, and savings rates, we see a middle class that is continue to struggle and probably not in a position to weather drastically higher borrowing costs.With near-term volatility in equity markets, investors have pushed yields on treasuries substantially lower than the beginning of the year. But despite the snap back stock rally we’ve seen, bond yields have only edged a wee bit higher. It does not appear that bond investors are anticipating a dramatically higher interest rate scenario. If anything, the bond market is telling us that there won’t be a robust economic recovery forthcoming.If that’s the case then prudent bond buys over the near-term may continue to make sense. Still, as I’ve cautioned for some time now, wading way out on the yield curve may not make sense. One, the relative yield benefit of buying 30-year bonds versus intermediate length paper today is somewhat negligible. Second, one cannot rule out a recovery when we look out over a 3-5 year time span. While visibility into such a scenario is very low, it seems prudent to keep blended portfolio duration away from the long end of the curve. It bears repeating the fact that holding long duration bonds during a rise in rates exposes one to tremendous opportunity cost.While the forward consequences of an end to QE are a bit hazy, a light at the end of the post-financial-crisis tunnel seems to finally be emerging. Though a tightening bias on behalf of the Fed would not necessarily be a positive development for bond investors, it probably is not reason for panic either. In the end, a higher rate environment could signal a return to economic normalcy which in and of itself would be a societal positive, given recent travails.Click here to learn more about best forex brokers.About the author: Adam Aloisi has over two decades of experience investing in equities, bonds, and real estate. He has worked as an analyst/journalist with SageOnline Inc., Multex.com, and Reuters and has been a contributor to SeekingAlpha for better than two years. He resides in Pennsylvania with his wife and two children. In his free time you may find him discussing politics, playing golf, browsing antique shops, or traveling.