Credit Suisse analyst: No more QE2? No problem

The end of QE II should be a non-event, a Credit Suisse analyst said today. Although the end of the Federal Reserve's second quantitative easing program in June has many people worried, it won't have a major impact on the markets, said Pankaj Patel, managing director at Credit Suisse AG. One reason is that institutional buyers will step in as they did after QE I ended in March, said Mr. Patel, who spoke today at the annual meeting of the National Association of Active Investment Managers in San Diego. What's more, the Fed is a smaller player in the Treasury market than most think, holding about 14% of outstanding bonds, versus more than 25% in 1998, he said And many big investors have already prepared for the end of QE II by shorting bonds, Mr. Patel said, so huge further sales are not expected. Credit Suisse says to look for the Fed to stop talking about the “extended period” of low rates later this year and to begin raising rates next year. Mr. Patel's comments surprised some advisers at the conference. The biggest concern about the Fed's action in the bond market are not its holdings of Treasury debt, but its role in buying new issues, said Will Hepburn, founder of Hepburn Capital Management LLC and a former NAAIM president. “Rates have to rise to attract those [institutional] buyers,” Mr. Hepburn said. The rate rise will be enough to “shock” the markets, he said. Many NAAIM members “are cynical of a [stock market] rally like this,” said Anthony Welch, co-founder of Sarasota Capital Strategies Inc. “The Fed has been driving it.” The central bank has been like “a financial crack dealer” that will have a hard time unwinding its expansive monetary policies, Mr. Welch said.