NEW YORK (ETF Expert) -- The familiar pattern of May-June gloom for stocks only led to a 5% selloff in 2013. Bonds, however, witnessed a repricing that many had not seen since 1994. Intermediate-term Treasuries lost 7% to 8%. Munis fell more than 10%. Meanwhile, investors trampled emerging market bonds for 12% to14%.Why did people redeem assets from bond funds so quickly? Why did the pace of those redemptions create liquidity issues for the fixed-income marketplace? In brief, the Federal Reserve had hinted that it might slow down the rate of its quantitative easing experiment of buying bonds to push rates lower. Consequently, the 10-year yield nearly doubles from 1.6% to 3% in an extremely short time frame. Many are now suggesting that a future crash in bond funds is a near certainty. They maintain that when rates rise -- not if they rise -- bond mutual funds and bond ETFs will not be able to handle the selling due to a lack of liquidity in the underlying assets. Indeed, during the height of this year's chaos, municipal bond ETFs like PowerShares National Muni ( PZA) and iShares S&P National Muni ( MUB) were trading at net asset value discounts of 300 basis points for at least a week. In the world of exchange-traded investing, premiums and discounts are supposed to be negligible.
Central banks like the U.S. Federal Reserve did underestimate the magnitude of the lack of liquidity in mortgage backed securities in 2008; for that matter, they were not even able to see the recessionary pressures of real estate or the problems with interest-only loans until the crisis began hitting epic proportions. On the other hand, the Fed successfully suppressed market fears in the 1998 Asian currency crisis. Similarly, since October 2011, the "do what it takes" Draghi-led European Central Bank has provided a multi-year lifeline to the beleaguered euro-zone. Do central banks really succeed when they bail out countries and regions? Should they even engage in rescue operations to squash rapid depreciation in asset classes? Those are philosophical questions with answers that may not become evident for decades, or even centuries. From my vantage point, though, the U.S. Fed continues to inflate a balloon that will be challenging to deflate slowly over the next five years. In fact, I doubt whether the Fed will ever decide to deflate the balloon at all; rather, as long as the dollar holds up, as long as foreign investors do not dump U.S. debt, I expect "tapering" to be replaced with yet another round of quantitative bond-buying easing (a la QE4). Granted, Janet Yellen recently claimed in her testimony before Congress that the Fed realizes QE cannot last forever. Nevertheless, with such a remarkably low tolerance for recession and zero fiscal stimulus coming down the pike, QE is going to be a saving grace for stocks and for bonds for years to come; that is, while a stock or bond bear is always a possibility in the near-term, an epic collapse will not occur unless investors everywhere lose confidence in the rescuing capabilities of the world's central banks. Follow @etfexpert This article was written by an independent contributor, separate from TheStreet's regular news coverage.