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Thursday, July 27, 2017

FED doesn't raise rate in July but may start QE tapering in September.

How will QE tapering affect the market?

QE tapering is reducing its bond purchases or rollovers (reinvestment of its bond proceeds upon maturing) on a monthly basis.

As bond price and yield are inversely related and demand affects the bond price, the yield will stay low when the bond price is high.  When there is lesser demand for the bond, the bond price will fall and the yield will go up.  This is almost the same as hiking interest rate without literally hiking rate.

Hiking rate literally will affect currency movement and short term rate but QE tapering will only affect long term rate and is more neutral for the currency and stock market.

On the whole, the interest rate will still go up albeit slowly.

1 comment:

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