True or False: The U.S. Federal Reserves quantitative easing (QE) policy has been to bond yields what a plastic lid is to a trick snake can. Once you open the lid, it's -- "POP!" -- and the toy snakes spring up and out?
According to many mainstream financial experts, the answer to that question is a clear and definitive true. Says a May 25 Reuter's article:
"Major Government Bonds Set For Steady Ascent... over the next twelve months in tandem with an imminent expiry of quantitative easing in the United States."
The assumption of a rate rally following the June 30 QE2 exit has even sparked a growing, world-wide debate on the need for a third round of Fed bond buying (or QE3). The recent news clip below explains the reasoning behind that argument:
"Yields on 10-year note fell below 3% for the first time this year. Every piece of economic data has been dreadfully weak. I would certainly bet that another round of QE is more likely. The decline in yields will make borrowing cheaper and could help boost the housing market." (Wall Street Journal)
There's just one problem with this theory: The powerful decline in long-term Treasury rates began long before the Fed pushed the "GO" button on its first QE campaign, QE1. Here, the following chart of 2-year and 10-year Treasury notes illustrates how in 2008-2009 the Fed has actually followed the bond market lower, not led it there.
- September 2008: The Fed starts QE1: an aggressive, bond-buyback program to take place over the next 12-18 months. But the reversal in bond yields actually began in 2007 -- one year earlier.
- December 2009: Despite the launch of bond-buying QE1 and $1-plus trillion Fed-backed stimulus, 2009 saw U.S. Treasury bonds deliver their worst year on record.
- June 2011: After three years, two rounds of QE, and $2-plus trillion --10-year Treasury yields are actually HIGHER than they were a year ago in 2010.
In the end, the Fed's QE campaign has not kept a lid on bond yields. Where they will go from here is one of many insights presented in the brand-new, June 2011 Financial Forecast Service.