We may not be getting Septemberâs FOMC minutes until Tuesday â but judging from the state of FT Alphavilleâs inbox on Monday, the only thing analysts want to talk about is the inevitability of more quantitative easing from the Fed. Most interesting of the lot â Barclays Capitalâs take on rates after QE is launched. First off â BarCap are shedding rate forecasts like thereâs no tomorrow, having placed a $1tn price tag on QE II, as indicated by yields on 10-year Treasuries dropping 50 basis points within a month. As Rajiv Setia and team, note: In our opinion, the market is already priced for a Fed on hold until late 2012 and for about a trillion dollars in additional asset purchases. We now look for 2y and 10y rates to end 2010 at 0.3% and 2.4%, compared with our prior forecasts of 0.7% and 3.0%, respectively. Near term, with an open-ended Fed asset purchase program in the offing, we have a hard time seeing investors willing to go short rates, regardless of the evolution of the economic data. Our rate forecast for YE 11 has also been lowered, but mainly in the front end; we now see 2s and 10s rising to 0.75% and 3.2%, respectively, by late 2011â¦ But second, BarCap point out a key flip-side to this forecast â thereâs a significant tail risk attached: â¦ if the unemployment rate rises to 10% by the end of 2011 and the inflation rate falls to 0.5%, the Fed would have to provide higher stimulus than is currently priced, which it can, given the âunlimitedâ balance sheet. This would reduce not only expectations, but also the term premium embedded in rates. On the other hand, if the unemployment rate falls to 9% and the inflation rate rises to 1.5%, the Fed would not only have to quickly unwind any new purchases, but also partially shed its current holdings. This would prove problematic, in our opinion, and result in a higher inflation risk premium, biasing long-term rates even higher than otherwise warranted. Queasy QE indeed. Although perhaps not if the Fed is actually rather comfortable with a higher inflation risk. From the same BarCap note: While we do not doubt that the Fed really would like inflation to trend around 2%, it clearly is willing to tolerate 3% rather than 1% and, therefore, investors should expect the Fed to overshoot its inflation objective over time. The path of inflation, as indicated by forward 1y breakevens, implies that the market does not believe the Fed will even get up to its target until around 2015 (Figure 2) [above, click to enlarge] and medium- to long-term forwards near 2.4% are essentially priced to hit its targetâ¦ â¦ which, with the inflationistas stirring, may be something to keep an eye on. http://ftalphaville.ft.com/blog/2010/10/11/365626/a-qe-easy-trillion/ So the whole world is long bonds and short USD...I adore crowded trades...ThatÂ´s going to be fun !