QE2 Ends, Bond Buyers May Do the '23 Skiddoo'
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The Federal Reserve's $600 billion bond buying program, or QE2, official came to an end today with the purchase of $4.9 billion in various Treasury securities.
The program, hinted at in August 2010 and launched in November, aimed to stimulate the economic recovery which at that point was seen as too slow. While it can be argued about the effectiveness of the controversial program, the stock market is up about 26 percent since Ben Bernanke's Jackson Hole speech on August 27, 2010. Critics will point to the fact that commodities are up just as much or more since that time.
While the $600 billion in treasury purchases is complete and will take out approximately $75 billion a month in buying, the Fed will continue to reinvest principal payments from agency debt and agency MBS. This is expected range from about $10-$30 billion per month.
Market participants expect that with the Fed significantly out of the treasury market, yields along the curve will move sharply higher.
Taunting the Fed today, Bill Gross, the CEO of the world's largest bond fund PIMCO, said "D-Day for QEII – who will buy them now?"
If bond buyers follow the Fed out of the market yields on a various government and other debt could surge, which could force the Fed's hand further.
Some suggest QE3 could involve the Fed placing caps on Treasury yields along the curve. Placing caps on Treasury yields is nothing new for the Fed. In the decade prior to an accord in 1951, the Federal Reserve maintained a 2 1/2 ceiling on long-term Treasuries. Moreover, they also held a cap on 12-month and 90-day Treasury bills.
The program, hinted at in August 2010 and launched in November, aimed to stimulate the economic recovery which at that point was seen as too slow. While it can be argued about the effectiveness of the controversial program, the stock market is up about 26 percent since Ben Bernanke's Jackson Hole speech on August 27, 2010. Critics will point to the fact that commodities are up just as much or more since that time.
While the $600 billion in treasury purchases is complete and will take out approximately $75 billion a month in buying, the Fed will continue to reinvest principal payments from agency debt and agency MBS. This is expected range from about $10-$30 billion per month.
Market participants expect that with the Fed significantly out of the treasury market, yields along the curve will move sharply higher.
Taunting the Fed today, Bill Gross, the CEO of the world's largest bond fund PIMCO, said "D-Day for QEII – who will buy them now?"
If bond buyers follow the Fed out of the market yields on a various government and other debt could surge, which could force the Fed's hand further.
Some suggest QE3 could involve the Fed placing caps on Treasury yields along the curve. Placing caps on Treasury yields is nothing new for the Fed. In the decade prior to an accord in 1951, the Federal Reserve maintained a 2 1/2 ceiling on long-term Treasuries. Moreover, they also held a cap on 12-month and 90-day Treasury bills.
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William H. Gross, Pacific Investment Management Company, LLC (PIMCO), Ben S. BernankeSign up for StreetInsider Free!
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