Elliott Wave InternationalmyEWISocioniomics.Net
Home > U.S. Economy

Are Low Bond Yields Living On the Fed's Borrowed Time?
Today's chart illustrates how the Fed's QE program has followed -- not led -- the bond market

By Nico Isaac
Mon, 06 Jun 2011 10:45:00 ET
Add to Facebook Add to Twitter Email to a friend Printer Friendly

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.
 

Rating: - based on [6 rating(s)]
Rate this content:
  
 


FFS"The clarity of your thoughts is so powerful that I typically read an issue at least a half dozen times." - R.N., Financial Forecast subscriber

The Elliott Wave Financial Forecast is a rational voice in a volatile marketplace with an unrivaled record of providing tomorrow's news today.

It helps you take control of your investments and anticipate the larger trends that most investors don’t recognize until it's too late.

Preview the latest Financial Forecast now>>

Free 50-Page eBook


Learn to Think Independently

The Independent Investor eBook can help you to challenge conventional notions about investing and explain market behaviors that most people consider "inexplicable."
Download your free Independent Investor eBook


© 2014 Elliott Wave International

The Elliott Wave Principle is a detailed description of how financial markets behave. The description reveals that mass psychology swings from pessimism to optimism and back in a natural sequence, creating specific Elliott wave patterns in price movements. Each pattern has implications regarding the position of the market within its overall progression, past, present and future. The purpose of Elliott Wave International’s market-oriented publications is to outline the progress of markets in terms of the Wave Principle and to educate interested parties in the successful application of the Wave Principle. While a course of conduct regarding investments can be formulated from such application of the Wave Principle, at no time will Elliott Wave International make specific recommendations for any specific person, and at no time may a reader, caller or viewer be justified in inferring that any such advice is intended. Investing carries risk of losses, and trading futures or options is especially risky because these instruments are highly leveraged, and traders can lose more than their initial margin funds. Information provided by Elliott Wave International is expressed in good faith, but it is not guaranteed. The market service that never makes mistakes does not exist. Long-term success trading or investing in the markets demands recognition of the fact that error and uncertainty are part of any effort to assess future probabilities. Please ask your broker or your advisor to explain all risks to you before making any trading and investing decisions.