Thursday, February 21, 2013

Jeff Cox — Who's Afraid of QE Ending? Not the Bond Market

..the stock market sold off at the slightest notion that the Fed might pull the plug.
"Equity markets seem to think of asset purchases as magic pixie dust," Cloherty said. "They just make everything fly. No one has a transmission mechanism for how that works, they just know it does."
The Standard & Poor's 500 lost 1 percent following Wednesday's Fed release and was on pace to add to that decline Thursday.
The bond market, though, was humming along even though a Fed exit from bond buying would seem likely to decrease demand and thus put upward pressure on yields.
Instead, yields fell and a popular exchange-traded fund, the iShares Barclays 20+ Year Treasury Bond fund, gained nearly one percent.
CNBC — US Markets
Who's Afraid of QE Ending? Not the Bond Market
Jeff Cox | Senior Writer


5 comments:

The Rombach Report said...

"The mixed messages apparently coming from the Fed illustrate the risks of trying to guide market expectations by pre-committing to particular policies," Julian Jessop, chief global economist at Capital Economics, said in a note. "The upshot is that an early end to QE3 might not result in the surge in bond yields that some would take for granted."

Anyone who still believes that and end to QE3 and/or QE4EVER will cause bond yields to surge higher has not been paying attention to to how the bond market has reacted to QE since 2008. Just look at the charts. Every time QE operations commence, yields shoot dramatically higher and when QE programs come to an end, bond yields fall just as dramatically.

This is not rocket science. For better or worse most market participants perceive that Fed QE operations equate to printing money and are therefore inflationary. So, they make the logical adjustments to their portfolios. As soon as it becomes clear that another round of QE is in the cards they sell the dollar and bonds and buy equities, commodities and credit -- i.e. RISK ON. And, as QE comes to an end they reverse that trade an take RISK OFF.

The Fed has a failure to communicate because they say they are doing QE to bring down long term interest rates down but at the same time they say they are trying to raise inflation. The Fed can't have it both ways. How can they say that they are trying to raise inflation and not scare bond holders?

Matt Franko said...

Ed,

Good points...

The other thing is the specs selling due to the "imminent hyper-inflation" ...

But I have to agree with Mike who asserts that all of these people have to be broke by now being so wrong for so long, and have no money left so they cant move the market lower as much as they did at the commence of QE1, which when it ended Bill Gross tweeted "who is going to buy them now" and then we had like the strongest bond rally in history...

imo if the Fed would just get out of the marketplace, which doesnt look likely, we would soon have a Japan-like interest rate curve with a 1% 10-year...

rsp,

The Rombach Report said...

"imo if the Fed would just get out of the marketplace, which doesnt look likely, we would soon have a Japan-like interest rate curve with a 1% 10-year..."

Absolutely agree. BTW, speaking of Bill Gross.....

04/27/11 PIMCO Makes a Gross Miscalculation... http://bit.ly/glYxgF

Matt Franko said...

Ed,

You called it!

I wonder if Gross lost his shirt in that trade and now he has to keep working even at his advanced age....

rsp,

The Rombach Report said...

No doubt that Bill Gross got hoisted on short squeeze petard of his own making. He has a reputation for talking his book and I reckon he was already short Tsys before he started banging the drum about a sell off after QE2 came to an end. He just wanted to be the size buyer of all those short positions from all the market participants who followed his advice and sold on the way down or worse.... at the bottom.