Why did QE cause treasuries price to drop and not increase?

Discussion in 'Economics' started by Newmoney24, Dec 13, 2012.

  1. With more buying of treasuries, it will mean higher demand, thus the price should go up (and interest rate down),

    Yet I guess I'm missing something bc the price actually went down and interest rate went up,
    Anybody know why?
  2. Ed Breen

    Ed Breen

    This is the way it happens every time. If you paid attention to QE1, 2 or 3 before this you would have seen that the announcement that the Fed will buy Treasuries has always hurt the price of Treasuries and caused the yield to go up....every time. If you actually look at what happens instead of listening to crap from the Fed or from ideology you have to see that QE causes interest rates to rise, equities to rise, commodities to rise and the dollar to fall...and when the announced QE comes to an end the interest rates fall, commodity prices fall, equities fall and the dollar strengthens. Now, the Fed says that it does QE to reduce interest rates but that is not what really happens...QE props up interest rates, every time; even though the Fed says it does it to reduce interest rates.

    So, you must see that the Fed is full of shit about what it says.

    So then, what is really happening? Contraction and deflation causes interest rates to decline, not the Fed. The Fed does QE...liquidity injections into the banking system...to fight contraction. I am not endorsing this, but that is what is happenning.

    Its like when the Zombies are coming and all you have is a shotgun with deer slugs...like in Terminator...the Fed is Arnold Swartzenager...you shoot the liquid metal robot Zombie with your shotgun and it stutters him...but it doesn't kill him...and then you have some time to run away...and then he comes at you again at you shoot him with the shotgun again...even thought you know it can't kill him...but it is the only weapon you have and you don't know what else to do...so you shoot and run...and hope something good happens but you really don't have a plan. That is what the Fed is doing...shooting Zombies in a B movie with a shotgun. Problem is that the the Terminator is a story and they wrote it so that it worked out...I don't know who is wirting the narrative of our curren monetary and fiscal reality; I think it is just being made up as it goes along...kind of like J.J. Abrams...he has not been very good at happy endings.
  3. Ed Breen

    Ed Breen

    This really should be part of the above post...but it took me longer than 30 mins to add it as an edit.

    Seriously, contraction is caused by the fiscal context which has destroyed ROI expectations on investment resulting in a contraction of private credit formation and so, private assets generally. Rather that addressing the fiscal perversities that discourage investment the Fed is injecting liquidity into the banking system on the theory that increased base money supply will automatically move out the yield curve and drive private credit formation and asset price inflation. Problem is that it does not work that way. Private credi formation responds to fiscal conditions that encourage investment with a promise of ROI; so private credit formation is not drive by base money in the banking system. There is no transmission mechanism to pull the base money through into real economy private credit formation where risk takers don't see the point in taking a risk. Stated differently, the fiscal contex dampens demand for private credit that connot be overcome by base money supply. So, the liquidity created by the QE just sits in the banking system as accumulated excess reserves on the Fed's balance sheet.

    So, you may be wondering, since all you asked was why did the rate go up when there should have been increase demand for the trasuries becuase the Fed was buying them...why? The shorter answer is that there really is no increased demand.

    If the Fed prints a money liability on its balance sheet and exchanges that liability with the Treasury for reciept of Treasury security assets which it books on the Fed balance sheet as assets to offset the new money liability, and the Treasury books the new securities it creates as liabiltities as it recieves the money from the Fed which it books as a corresponding asset, and understanding that the Fed and the Treasury represent two sub accounts in the consolidated Federal Government balance sheet, you can ask the question of whether any debt was actually formed. When you sell IOUs to yourself do you really expand the market for IOUs, do you really expand the supply of IOUs if you buy them yourself? What is the difference bewteen that and not ever creating the securities in the first place. Think about that for a while.
  4. iggy9807


    Short answer: the "news" was already discounted in the price and the Fed didn't go beyond the expectations.

    Still, I expect prices to go up and yields to go down this year. The Fed will buy the equivalent of all new treasuries next year ($1T). People who need to reinvest their treasuries will have "nothing" to buy.
  5. Ed Breen

    Ed Breen

    The price first went up from around 1.5% on the 10 yr when QE 3 RMBS and continued TWIST was announced over a month ago...it went up to about 1.75% at that time and then drifted back to around 1.6% with implied contraction from the fiscal discord...so, yes most of QE 3 was in the news. What was different was the follow through of QE 4 buying $45B of longer term treasuries as the TWIST program is phased out, and as you say this was mostly expected...but none the less the rate on the 10 yr rose again to now around 1.73%. A recent CNBC poll of bond traders shows a consensus that they expect 10 yr rates to rise above 2% during the next three months....so you are not in the majority on your call.

    What is clear is that people who pay close attention to these issues have noticed that QE results in support for equity prices and weakness in bond prices...higher rates; so long as the QE continues. Private actors act to sell down bonds when QE is announced and move that money to equities and commodities. That explains the weakness in bond prices despite the increased Fed purchasing. The Fed creates neutral transactions and destroys more demand than they create though QE.

    The real drive of the 10 yr rate is now the fiscal dysfunction agreement which will move the bond rate one way or the other depending on the likelihood of contraction coming out of the new taxes. It is contraction that moves money into bonds and casues the bond yield to decline.
  6. zdreg


    "nothing" is not quite true. there are substitutes e.g hard assets gold, silver commodities , land, factories businesses etc. the yuan and yes the ruble.
    there will be a tipping point as the dollar loses its reserve currency status and the dollar continues to weaken. the crap $US dollar cannot not even strengthen strongly against the beleaguered euro.
    ask the happy Swiss, Australians and Canadians.
    at some point market forces will overwhelm interest rate manipulation by the fed and will shoot up. e.g. tipping point- increase in velocity of money.
  7. Bob111


    you forgot to add-on mortgages, to boost housing prices up

    here us the pic of mortgage rates(in case,if you missed)
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  8. Ed Breen

    Ed Breen

    I never said that interest rates have not declined over time; I suggested that the Fed did not cause the decline with QE and that every time the Fed announced QE the rate on Treasuries has increased and remained higher during the QE, only to decline at the end of each QE.

    Mortgage rates of course moved lower within the rate structure for fixed income based on the Treasury rates.

    Mortgage securites have now been effectively nationalised as the Fed Gov. buys almost all the mortgages through FNMA, FHA, FDMC which are wholly owned by the Gov. and then the Fed buys the bundled mortgages as securities from those GSEs to provide liquidity to the GSEs to continue mortgage origination. The U.S. Government will fast become the primarly creditor to home owner debtors; much as it is for student loan debtors. Maybe there will be a program that if you cut your grass nice you can get a credit on your loan payment...support home ownership and fight unemployment at the same time!

    Seriously, all this manipulation destroys the important primary pricing function of free markets.

    The other issue that you need to see in all this QE is that it moves income out of the private bankinig system and into the Fed. There is no U.S. Savings and Loan industry anymore...the Gov is the Mortgage Lender to the U.S. and the revenue from all those private loans that used to be in the private banking systme is now flowing to the Fed and being turned over the Treasury in increasing amounts each year. Banks that no longer have so many Treasury assets and mortgage assets are not replaceing these assets with new loans; the private bank money is moving from higher earning assets to lower earning short term assets and excess reserves. This of course leads to lay offs in the private banking economy.

    So, QE also creates financial sector unemplolyment as it drives income from the private sector to the public sector.

    Do you see any irony in the Fed setting an unemployment target for the phase out of its QE actiions?
  9. Bob111


    --Seriously, all this manipulation destroys the important primary pricing function of free markets.---

    100% right. fed and gvt are all over the place. makes no sense to me. simply cause it's not in constitution. gvt shouldn't be in lending business regardless. it's f** up on so many levels
  10. Ed Breen

    Ed Breen

    Fed Gov. Fisher of Dallas today compared the QE and other actions that explode the Fed balance sheet with 'Hotel California.' He said that he is not sure that the program can be ended, that 'you can check out but that you can never leave.'

    That is a cute sound bite but I don't think it provides much perspective on what is likely. I think the Fed has already structurally planned its exit strategy. If you look closely to the way it is restructuring its Treasury Portfolio it appears that the fed is simply planning to let the portfolio securities mature. The issue of exit will be one on slowing down and stopping QE and then not reinvesting the funds that mature. The plan then, is for the Fed Balance sheet to decline over 30 years.

    A Quant Guru hedge fund friend on mine explained to me that he sees fed actions as struggling to 'amortize catastrophe' (See Mike Rulle, "The Law of the Bad Premise," blog). We had a catostophe that wiped out trillions and trillions of malinvested savings assets and we are struggling to amortize that loss without destroying our social and economic fabric.

    I think we need a more coherent plan to actully pull that off.
    #10     Dec 14, 2012