Treasuries
Over the past 18 months, the Federal Reserve increased its balance sheet by $1.7 trillion which largely represents purchases of U.S. Treasuries and mortgage bonds. The quantitative easing program supposedly ended in March, yet Federal Reserve assets continue to grow (Chart 19). Central bank intervention is suppressing yields well below what the market would determine, particularly given the new found appreciation of risk in sovereign debt (Chart 20). We expect heavy intervention in sovereign bond markets to continue. But this is clearly an unsustainable situation and conservative investors, who want to minimize risk, should focus on the sovereign debt issued by countries with relatively sustainable fiscal situations3 (Chart 21).
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