The Fed doesn’t always live up to market expectations.
Some traders had been expecting the central bank to buy 30-year bonds as part of its Wednesday QE2 announcement. But the long bond has largely been left out of the latest US Treasury-purchasing programme, with buying focused in the four- to 10-year range. Cue, as we noted post the announcement, hefty 30-year reaction.
Back in August, David Rosenberg was convinced that yields on longer-term USTs would collapse once the US central bank started QE2 to boost the economy.
Not so, anymore! From the Gluskin Sheff man’s latest morning note:
The bulk of the bond purchases are in the mid-part of the curve where yields are already 1%. What good is another handful of basis points decline really going to do for the economy at this part of the curve? Not much. Only 6% of the bond buying is in maturities of 10 years or longer and that is what matters most for the economy and that is the only part of the curve where there is any juice left, in terms of basis point yield impact …
I can only surmise that the Fed had a view six-weeks ago that the economy would be contracting by now and it clearly isn’t. Or that Bernanke would have faced more dissents had he targeted the 10-year and above part of the Treasury curve, which would have been far more stimulative. It is truly hard to believe that targeting a part of the curve that is already yielding 1% is going to have much of a macro effect.
And a(nother) quick glance at the spread between the five- and 30-year US Treasury shows that it’s reached a record wide of about 297 basis points. That would be steepening of the long-end of the yield curve, ‘stead flattening.
Of course, it’s rather irrelevant now anyway.
The Federal Reserve has firmly departed from the yield curve-flattening aim of its original quantitative easing. QE2 — donchaknow — is all about boosting asset prices.
Related links:
Moving targets, (UK) QE edition – FT Alphaville
Fed ignored foreclosed homes in asset choices - Caroline Baum, Bloomberg