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Bye-bye QE2?

This chart of the yield on 10-yr Treasuries shows the rather dramatic rise in rates that has occurred in the past week. As I mentioned a few days ago ("Return of the bond market vigilantes") the market is not only protesting the Fed's decision to move ahead with QE2, but now appears to be thinking that it might be cancelled or significantly cut back. This coincides with mounting opposition from all quarters to the idea of QE2, culiminating in today's release of an open letter to Bernanke from a group of notable economists and investors.

As I've said before, QE2 is not only unnecessary but foolish. The sooner it is put out of its misery the better. And to the extent that calling off further QE2 disappoints the market, that is a great buying opportunity for investors who understand that too much money is not a good thing.

UPDATE: Here is a chart that compares the 10-30 Treasury spread with the market's forward-looking inflation expectations. The action in both is fully consistent with the market changing its expectations about QE2. Less QE2 means the 10-30 spread needs to return to more normal levels, and inflation expectations have to decline.

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