October 2014 marked the end of the Federal Reserve's asset-purchase program known as QE3. The Fed has used quantitative easing – or "QE" – to drive down interest rates and inject liquidity into the economy in pursuit of maximum employment and price stability. The policy has not been without risks, however. The prices of many security types in the Barclays Aggregate indexes have been propped up by Fed demand. Given that the central bank has purchased roughly half the Treasury bonds that have been issued over the past two years, the U.S. government will need to find buyers for new issues in place of the Fed. Domestic private-sector investors tend to be more sensitive to yields versus the Fed or foreign government buyers. As a result, Treasury yields may need to go higher to attract sufficient demand from private-sector investors.
A series of bond purchase programs have expanded the Fed's balance sheet while holding down interest rates.
Sources: U.S. Department of the Treasury, Federal Reserve, as of 12/31/14. Past performance is not indicative of future results.
What are the risks?
As the Fed concluded its asset-purchasing, interest rates could begin to head higher and bond investors may experience losses on their investments. The Fed holds more than $4 trillion in bond assets on its balance sheet – a historically high level. How the Fed approaches selling its assets in the future has the potential to have a significant impact on interest rates and bond investors. If the Fed attempts to sell too much of its holdings too quickly, the excess supply could cause bond prices to drop quickly.