Home > Main > QE has only 2 months to go, but 30yr haven’t broken highs yet

QE has only 2 months to go, but 30yr haven’t broken highs yet

April 25, 2011

Expectations matter in the markets.  Everyone and their brother “knows” that the end of QE means a huge, huge jump in yields.  People must be scrambling to sell Treasuries while they can, before Treasury yields hit 10 or even 20%.

And yet, 30 yr yields  – which are the most sensitive to long term expectations – cannot make new multi-year highs.  According to most textbooks, QE is about as inflationary as it gets.  Not only should we have high inflation today – we should have rocketing inflation expectations expressed through much higher yields in long bond yields.

I expect lower yields once QE II ends, not for long, and not a massive drop.  The cash for clunkers post-program effect might be quite impressive this time.   During QE I, yields did actually go higher.  During QEII, yields are just remaining stable.  I would find this market action very worrisome, if I was Bill Gross. Maybe Bill Gross will short even more Treasuries — ya know, double up to catch up.

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  1. Detroit Dan
    April 25, 2011 at 5:51 pm

    Do you expect 30 year yields to go down to 2%? That’s what it seems from the cash for clunkers link. I hope so — I’m long bonds…

    • TC
      April 25, 2011 at 8:35 pm

      2% is a little far. I could easily see a pop from the end of qeII on the long bond of .5% over the first 6-8 weeks. Then it will become obvious there isn’t any inflation other than oil price inflation, and the bonds then go to the 3.25 level. I think the long bonds have a hard time getting lower than that in non-crisis times, simply because the inflation expecations for the U.S. are 2%, and people expect a real return of 1%

      But then we have Japan. Who knows what will happen?

  2. apj
    April 26, 2011 at 8:18 am

    Yields went higher in all QE programs, including US, UK and, prior to that, Japan. My sense is that the ex ante rally in bonds up until that point (of actual buying) was a reflection of how poor the economic prospects were for those countries at the time (and throw in some spec as usual). Yields are expectations, at the end of the day, and I recall the poor feeling about the US and UK economies at the time quite vivdly (though I can’t claim the same for Japan, I just doen’t remember!). The implementation of the policy was supposed to be the great saviour of the economy according to part of the crowd, and the spiral into uncontrollable inflation by another (digression: it’s pretty funny to watch the sturm und drang about 1.2% core US CPI, when creating a bit of inflation to guard against deflation was a high-rank motive of the Fed from the outset. I mean….1.2%! lol). And in the middle were the markets, perfectly happy to engage the one-way-bet signal that QE really (explicitly) is….Your point about 30yrs is well noted – it is surely the cause of significant consternation amongst the bond bears, as well as an(other) example of the specs driving commodities and risk assets.

    So I think it’s easy to see why rates went up over the period of QE. The sigh of economic relief was trumped only by the screeches of sell by the chicken littles of inflation. Funny how it hasn’t actually occurred (nor any major bond yield breakout), and yet, no soul searching. Astonishing.

    The ex post rallies associated with the end of QEs generally seem to also be a reflection of the fact that the QE (surprisingly) didn’t seem to take…now where did I put that damned multiplier, it must be around here somewhere!….The US economy is already beginning to sputter from an already weak recovery, and I, like you, see the current rally in bonds continuing, particularly as the exit problem remains one for the markets, not the Fed (IMHO). I’m still far more concerned about 3% 10yr yields than 4% given the US seems to have crossed the rubicon into the beginnings of austerity. Time will tell, I suppose.

    • TC
      April 26, 2011 at 8:18 pm

      If anything, the Vigilantes have become even more hysterical! I wish I had more time right now to talk about this – I spend lots of time trading… 🙂

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