Lending Club Blog

Quantitative Easing?

We’ve been hearing much about quantitative easing recently. What exactly is quantitative easing, and more importantly what does it mean for you as an investor?

The Federal Reserve is expected to announce a second round of quantitative easing (dubbed “QE2”) at its next meeting on November 3. Quantitative easing means that the Fed, which can no longer lower interest rates –which are already close to 0% – to stimulate growth, will inject more liquidity into the economy by buying government debt and mortgage-backed securities. The notable difference between QE2 and the previous round of quantitative easing implemented earlier this year is that the Fed might also buy corporate debt this time around.

The likely impact of another round of quantitative easing is higher bond prices and lower yields. Historically, the role of fixed income instruments such as corporate bonds and the Prime Consumer Notes offered by Lending Club was to offer a dampener to overall portfolio volatility, while also providing investors with sufficient current income to either reinvest or spend.  However, today’s world offers very little in terms of current income given historically low rates.  Your return from many fixed income instruments, such as bond mutual funds, is now heavily dependent upon future price appreciation/depreciation, rather than current income.

Yields on most fixed income instruments were already near all-time lows and the next wave of quantitative easing will likely result in even lower yields. So, where can fixed income investors go to get yield?

In the chart below you can see a traditional fixed income yield spread analysis that highlights the BA Merrill Lynch High Yield Master Index, Lending Club Notes, and U.S Treasuries (3-5 year durations). The Treasuries are represented here as the baseline.  What the data show is that spreads on high yield corporate bonds have fallen a great deal and are now back to pre-crisis levels, while the spreads on Lending Club’s notes remains very large.

Interest Rates in Excess of US Treasuries

Today, Lending Club has lowered rates on its personal loans in response to the overall economic environment, and in an effort to continue attracting prime and super-prime borrowers, who typically make decisions based on rates and monthly payments.  Even after taking into account today’s rate reduction, the yield spread on Lending Club’s Prime Consumer Notes remains near all-time highs. Our Notes also offer a relatively unique opportunity to earn current income in today’s market.

Monday, October 18th, 2010 at 6:45 am

Comments (4)

  1. Imad Mohammadi:

    I am strictly a lender at LC so the higher the interest rates the
    better. I can also understand the pain the borrowers must feel. It
    is important to find a balance between high bank rates and low bond
    rates in order to attract parties on both ends. IM

    October 18th, 2010 at 9:49 pm

  2. Sam Anderson:

    Finally, a simple enough explanation for Quantitative Easing

    October 20th, 2010 at 1:12 am

  3. Lindy P:

    The stock market on a day-to-day basis resembles a casino, simply
    without the ease of free cocktails. Following the stock ticker is
    like experiencing a business partner that is wholly unbalanced;
    Graham names him “Mr. Market.” One day he loves the job and wishes
    to bear a ridiculous price to buy out your half. The next day, all
    hope is gone, and he desires to sell you his portion for cents on
    the dollar. Graham reasons that this day-by-day liquidity is an
    advantage that most investors turn against themselves: (p. 203)
    “But observe this remarkable fact: The actual investor barely ever
    is pushed to sell his shares, and at all other times he is free to
    ignore the contemporary price quote. He need bear attention to it
    and move upon it entirely to the extent that it accommodates his
    book, and no more. Therefore the investor who permits himself to be
    stampeded or unduly stressed by unjustified market falls in his
    belongings is perversely transforming his underlying advantage into
    a fundamental disadvantage. That man would be better off if his
    stocks had no market quotation at all; for he would then be saved
    the psychological hurt caused him by other persons’ faults of
    opinion.” This is remarkable. It’s not a question of whether our
    stocks will fall; they will: the trick is how we respond to that
    contingency.

    October 29th, 2010 at 2:23 pm

  4. P Charney:

    can quantitative easing be used in adjusting a individual’s
    personal finances?

    November 8th, 2010 at 8:24 am

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