Home > Main > Godzilla’s Bond Rally Begins: QE II as “Cash for Clunkers” update

Godzilla’s Bond Rally Begins: QE II as “Cash for Clunkers” update

August 8, 2011

Remember our old “Cash for Clunkers” QE II model?  I said that everyone who wanted to sell bonds at all for the next few months would do so before QE II ended.  This would result in a natural vacuum of sellers after QE II ended.

I also said there would be the “Godzilla of all bond rallies” post QE II.  This is a chart of 30 year yields. Yields are opposite of price.  Lower yields mean higher prices.

See that huge red bar at the end?  That means a huge rally in bond prices.

Lots of people think the world is ending right now. It looks bad out there, but there should be some appreciation of the fact that the most willing sellers of U.S. Treasuries sold them during the actual time of QE II.

The actual GDP numbers – while anemic – aren’t falling at anywhere near late 2008 levels.

Question: How much of this panic is due to a completely wrong interpration of what’s happening in the oil markets?

People say that lower oil prices means that the economy is tanking, but it’s more likely that the speculative bid under oil just shifted out of oil.

Lower oil prices are great for the real economy, not bad.

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  1. Clonal Antibody
    August 8, 2011 at 11:17 pm

    DeLong still does not get it! He says

    You Know, If You Had Told Me a Year Ago That on August 5, 2011 S&P Would Downgrade the U.S, and the 10-Yr Treasury Would Yield 2.5%…

    … I would have laughed at you. I would have said that while there were possible futures in which each of those things happened, they were disjoint futures.

  2. Peter D
    August 8, 2011 at 11:31 pm

    Hahaha, I commented:
    http://delong.typepad.com/sdj/2011/08/you-know-if-you-had-told-me-a-year-ago-that-on-august-5-2011-sp-would-downgrade-the-us-and-the-10-yr-treasury-would-yiel.html#comment-6a00e551f080038834014e8a7d39ad970d

    And if I told you that such an outcome is entirely predictable with MMT – and that MMTers have indeed been predicting exactly such outcomes – would you maybe change your mind and look further into what you might be missing?

  3. gf
    August 8, 2011 at 11:37 pm

    My guess is he just never heard of Japan.

    Just throwing it out there. You know the only other remotely comparable example we have.

  4. Peter D
    August 8, 2011 at 11:39 pm

    On the second thought, he seems to be making a point that S&P should not be downgrading US when the yields are so low (not the point I originally assumed, which was that the yields are low despite S&P downgrade.) But then again, if the yields were say 4%, why would there be any downgrade for a govt that issues debts in its own currency?
    I commented in line on his website, lets see if he approves. HE might be pissed off for all the MMT nagging 🙂

    • Clonal Antibody
      August 8, 2011 at 11:59 pm

      That can’t be his thought process, for he said that the two futures were disjoint, and could not occur simultaneously. As per MMT, it does not matter if the yield is 20%, the Tsy’s should always be rated AAA, as debt denominated in currency of issue can always be paid back. The 20% yield would be because of Fed policy and not because of bond vigilantes.

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