We promote cheaper funding ability,
But investors who yearn
For a decent return
Must accept more default probability."
The Fed Open Market Committee announced the details of its latest stimulus program on Wednesday, and it's a doozy: under the 3rd round of quantitative easing, the Fed will purchase up to $40 billion a month of mortgage bonds and Treasuries, in addition to its $45 billion of monthly machinations under the Operation Twist program. This massive QE3 intervention is intended to lower long-term interest rates, as the Fed long ago did for short-term rates. Chairman Bernanke and colleagues hope to drive the 10-year T-note, currently yielding 1.75%, back to its July low of 1.38%.
For bond investors, all this rate compression inflames an already acute yield pressure. Those who want to earn an attractive yield must either shift into riskier bonds, or reduce their fixed income allocation in favor of stocks or other more volatile asset classes. As one CIO expressed it to the Wall Street Journal, retail investors "are practically walking around in a daze; they don't know what to do. There is no safe yield out there, so they are redefining what is safe, which is a dangerous thing to do."