Fed Tapering on Bonds

Before coming to Fed Tapering, let us have a clear insight on bonds. In simple terms, bond is a debt security. A company issues its bonds to government, municipality or corporations inorder to raise funds. In return, the company pays interest to its investors for a specified time period

In times of crisis, almost every company and private investors will be in short of cash and cannot be an investor in huge extend to save the economy. So the government will buy the bonds of companies to give enough liquidity to the companies to certain amount of time. In other words, government put money in pockets of businesses to run smoothly and get a decent minimal return for that investment

• Bonds provide predictable income. Typically bond pays interest twice a year

• When bonds are held to maturity, bondholders will get the entire principle amount. This is also the best way to preserve capital while investing

• Compared to more volatile stock holdings, bonds are very simple and fixed return giving instrument

During the crisis period (Covid times), many companies went out of cash. Lockdowns are one of the reasons for the companies to shut down their doors. It is government responsibility to keep the business going to save the economy. Hence Fed started to buying bonds of companies, so companies can get enough cash to keep the business running

On 15th March 2020, Fed said it would buy at least $500 Billion (Rs.37,50,000 Crores) in Treasury securities and $200 Billion (Rs.15,00,000 Crores) in government guaranteed mortgage backed securities over the coming months

On 10th June 2020, Fed said it would buy atleast $80 Billion (Rs.6,00,000 Crores) a month in Treasuries and $40 Billion (Rs.3,00,000 Crores) in residential and commercial mortgage backed securities until further notice. Between mid March and early December 2020, the Fed's portfolio of securities held grew from $3.9 Trillion to $6.6 Trillion

Now it is unwinding of the covid times and business are coming to its normal situations. So Fed is in a discussion to Taper the bonds, which means it would stop buying bonds or will reduce its investments in bonds. So, the investment in companies by the government will reduce. When the investment flowing into the companies are reducing, then the stock price of the company will reduce. This will impact the stock market across the countries

On Wednesday (22.09.2021), Fed announced it will reducing the purchase of bonds / Taper the bonds purchase soon and end by the mid of 2022. During the press release, it was noted that the Fed would start its bond purchase tapering by November 2021 and end by 2022. So November 2021 would be a crucial month for stock markets

On the other hand, the Fed had reduced the interest rates very heavily during the covid time and it is expected to rise its interest rates by next year (2022). So, the Traders and Investors should consider this very seriously before investing. Now, the market would look very green everywhere as the Fed announcement has postponed certain things but Tapering and Increasing the interest rates will happen definitely.

Disclaimer: Consult your financial advisor before investing / trading in stock market. Above blog is only for the information purpose. Stock market has the highest risk if not dealt with adequate knowledge.

Have a Great Day

B G Nareshkumar