Will QE3 Move Money Out of Bonds, Into Stocks?

United States Federal Reserve
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United States Federal Reserve

Out of bonds, into stocks. The Federal Reserve gave the market most of what it wants: essentially open-ended purchases of mortgage-backed securities, some disappointment it also did not include Treasury purchases.

Financials, materials and housing stocks were big gainers; some financials in particular Bank of America were stronger because they have large portfolios of bonds that the Fed will be buying.

Treasury ETFs all dropped (iShares Barclays 1-3 Year Treasury Bond Fund , iShares Barclays 7-10 Year Treasury Bond Fund , iShares Barclays 20+ Year Treasury Bond Fund ), and high yield bond ETFs (JNK, HYG) continued to hit new highs on heavy volume as investors continue to reach for yields.

(Read more: Dow Spikes 200, Lifted by Fed; S&P Hits 1460)

Bonds sold off, because there may have been some expectations the Fed would do additional purchases of Treasurys, which did not happen.

They are purchasing additional agency mortgage-backed securities...$40 billion a month. This, in addition to the roughly $45 billion being purchased from its Operation Twist program, where it is buying at the long end and selling on the short end.

The key statement: "the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability."

That is essentially open-ended, to be terminated when the outlook for the labor market improves.

The Fed also said low rates would be warranted "at least through mid-2015."

The big question: will this finally move people out of their bond funds, especially Treasury funds, and into stocks? Never mind that the S&P 500 is up 40 percent since August 2009; investors wanted low volatility and safety. By that standard, those investors have been very well treated in the past three years in those bond funds.

But now, the long-term bond ETF (TLT) is at a 4-month low.

That might be enough to get a few investors’ attention, but it’s not enough. Not yet. There will have have to be more damage than that to get investors out of those bond funds, but it's moving in that direction.

—By CNBC’s Bob Pisani

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