19-11-2010, 07:23 AM
Business Times - 19 Nov 2010
Fed may call an early end to QE2: analysts
They cite rising bond yields, stronger US$, improving economy
By ANDREW MARKS
NEW YORK CORRESPONDENT
IT has been all of two weeks since the US central bank announced its intentions to purchase up to US$600 million in government bonds over the next several months in order to spur the weak economy into higher growth mode.
But the bond market has responded to the launch of the Federal Reserve's bond buying plan by doing precisely the opposite of QE2's intended effect of lowering interest rates yields to make credit purchases and business investment more appealing to recession-wary consumers and corporations.
Indeed, a series of developments since the Fed announced QE2 have put the controversial programme's outcome in doubt: Signs the US economy is mending faster than thought just a month ago, the US dollar strengthening due to renewed eurozone sovereign debt worries, possible inflation in commodities, and the harsh response to QE2 both at home and abroad - both from the Chinese and the G-20 ministers last week - have Wall Street talking about the chances that the Fed might end QE2 long before it's spent all the US$600 billion.
'QE2 may not cross the finish line, and investors should consider, and plan for, that possibility,' said Nick Colas, chief investment strategist at ConvergEx Group. That's quite a turnaround from the speculation over whether the Fed will feel it necessary to add to the US$600 billion buying in future months (QE3) that was making the rounds in Wall Street.
The Fed planned to buy Treasuries every day this week, including 2 to 3-year notes on Tuesday and 8 to 10-year notes on Wednesday, totalling US$35 billion. It has committed to buying through Q2 next year.
But investors have been selling off US Treasuries, driving some rates to their highest levels in months, presenting both a potential problem for the economy and the Fed.
The 10-year Treasury note's yield, which influences most residential mortgage rates, surged on Monday to 2.911 per cent, the highest since Aug 5. Bond prices and yields move in the opposite direction.
The yield on the 7-year Treasury note rose to 2.14 per cent, a two-month high, despite the Fed buying US$7.92 billion in 6 and 7-year Treasury debt on Monday.
Indeed, yields on the Treasury's 10-year note and 30-year bond have gained more than a quarter percentage point each since the Fed's announcement on Nov 3. The yields are closely tied to lending rates, which the Fed had hoped would go down and push investors into buying riskier assets outside of Treasuries.
Stocks also have fallen, dropping more than 3.5 per cent in the same time frame as the Fed's programme has come under criticism from both ends of the spectrum - either for being too little to make a difference or posing a longer-term inflation risk as liquidity continues to flood balance sheets but not make its way into the economy.
The recent move in interest rates may be due partly to the rosier tone of economic data recently, including data released on Monday that showed retail sales at their highest level since August 2008, the month before the fall of Lehman Brothers.
If the economy keeps improving, then the Fed's bond buying programme could end sooner than expected. 'The Fed's own reference points on the economy, summarised in recent Beige Books, do not read like the scary 'bump in the night' that would cause the Fed to make such a drastic move like this second round of Quantitative Easing,' said Mr Colas, who speculated the central bank might have a strategy already in place for calling an early end to QE2.
'Cancelling QE2 early because the economy is improving' would be a big boost to both market psychology and the Fed itself, Mr Colas noted.
The Fed surely feels under attack these days. While fellow central bankers in the G-20 remonstrated with QE2's impact on lowering the US dollar, Republican lawmakers are on the warpath, too. On Tuesday, Republicans put forward a bill that would narrow the Fed's focus to price stability and take away its other objective of full employment. Republican politicians have been sharply critical of the Fed's plan, saying it could spur inflation and hurt the US dollar.
If the US labour market continues to show improvement in the coming weeks and months, and if lower interest rates can spur demand for durable goods such as motor vehicles, then GDP for the next few quarters may come in better than expected, Wall Street analysts observed. 'Mr Bernanke could credit the controversial monetary policy' for the upturn, Mr Colas said.
Fed may call an early end to QE2: analysts
They cite rising bond yields, stronger US$, improving economy
By ANDREW MARKS
NEW YORK CORRESPONDENT
IT has been all of two weeks since the US central bank announced its intentions to purchase up to US$600 million in government bonds over the next several months in order to spur the weak economy into higher growth mode.
But the bond market has responded to the launch of the Federal Reserve's bond buying plan by doing precisely the opposite of QE2's intended effect of lowering interest rates yields to make credit purchases and business investment more appealing to recession-wary consumers and corporations.
Indeed, a series of developments since the Fed announced QE2 have put the controversial programme's outcome in doubt: Signs the US economy is mending faster than thought just a month ago, the US dollar strengthening due to renewed eurozone sovereign debt worries, possible inflation in commodities, and the harsh response to QE2 both at home and abroad - both from the Chinese and the G-20 ministers last week - have Wall Street talking about the chances that the Fed might end QE2 long before it's spent all the US$600 billion.
'QE2 may not cross the finish line, and investors should consider, and plan for, that possibility,' said Nick Colas, chief investment strategist at ConvergEx Group. That's quite a turnaround from the speculation over whether the Fed will feel it necessary to add to the US$600 billion buying in future months (QE3) that was making the rounds in Wall Street.
The Fed planned to buy Treasuries every day this week, including 2 to 3-year notes on Tuesday and 8 to 10-year notes on Wednesday, totalling US$35 billion. It has committed to buying through Q2 next year.
But investors have been selling off US Treasuries, driving some rates to their highest levels in months, presenting both a potential problem for the economy and the Fed.
The 10-year Treasury note's yield, which influences most residential mortgage rates, surged on Monday to 2.911 per cent, the highest since Aug 5. Bond prices and yields move in the opposite direction.
The yield on the 7-year Treasury note rose to 2.14 per cent, a two-month high, despite the Fed buying US$7.92 billion in 6 and 7-year Treasury debt on Monday.
Indeed, yields on the Treasury's 10-year note and 30-year bond have gained more than a quarter percentage point each since the Fed's announcement on Nov 3. The yields are closely tied to lending rates, which the Fed had hoped would go down and push investors into buying riskier assets outside of Treasuries.
Stocks also have fallen, dropping more than 3.5 per cent in the same time frame as the Fed's programme has come under criticism from both ends of the spectrum - either for being too little to make a difference or posing a longer-term inflation risk as liquidity continues to flood balance sheets but not make its way into the economy.
The recent move in interest rates may be due partly to the rosier tone of economic data recently, including data released on Monday that showed retail sales at their highest level since August 2008, the month before the fall of Lehman Brothers.
If the economy keeps improving, then the Fed's bond buying programme could end sooner than expected. 'The Fed's own reference points on the economy, summarised in recent Beige Books, do not read like the scary 'bump in the night' that would cause the Fed to make such a drastic move like this second round of Quantitative Easing,' said Mr Colas, who speculated the central bank might have a strategy already in place for calling an early end to QE2.
'Cancelling QE2 early because the economy is improving' would be a big boost to both market psychology and the Fed itself, Mr Colas noted.
The Fed surely feels under attack these days. While fellow central bankers in the G-20 remonstrated with QE2's impact on lowering the US dollar, Republican lawmakers are on the warpath, too. On Tuesday, Republicans put forward a bill that would narrow the Fed's focus to price stability and take away its other objective of full employment. Republican politicians have been sharply critical of the Fed's plan, saying it could spur inflation and hurt the US dollar.
If the US labour market continues to show improvement in the coming weeks and months, and if lower interest rates can spur demand for durable goods such as motor vehicles, then GDP for the next few quarters may come in better than expected, Wall Street analysts observed. 'Mr Bernanke could credit the controversial monetary policy' for the upturn, Mr Colas said.
