In a recent presentation, Jeffrey Gundlach, portfolio manager of DoubleLine Total Return Bond Fund (DBLTX/DLTNX) presented an interesting chart on U.S. Treasury interest rates and quantitative easing (QE). Gundlach believes QE I and QE II actually contributed to higher rates on 10-Year Treasury Bonds. This chart spells out that relationship:
[Click to enlarge]
In this chart, the blue line represents the yield on 10-Year U.S. Treasury Bonds. In November of 2008, during the height of the financial panic, the 10-year yield dropped almost to 2%. QE I purchases began shortly thereafter and yields moved up to almost 4%. When QE I ended on March 31, 2010, yields again slumped to about 2.5%. QE II came along in November 2010 and yields again soared. QE II is slated to end on June 30. What happens then?
Gundlach is simply pointing out that Fed intervention has distorted the yield on 10-year Treasury securities. Obviously, it has done so also by driving down yields on the short end and the long end. Gundlach only covers the long end in this chart, but we all know how low interest rates are on Treasury bills, money market funds and bank accounts. Why has the Federal Reserve under Chairman Ben Bernanke been doing this?
Rebuilding banks on the backs of savers
My belief is that the Federal Reserve is desperately trying to deny reality, which is that many of our largest financial institutions ran themselves into the ground in 2008. So the Fed wants to keep short-term interest rates very low, and QE I and QE II have done that. And remember: That is the rate paid on Americans’ savings accounts, money market funds and Treasury bills.
The Fed also wants long-term rates to be fairly high. By keeping short-term rates low and longer terms rates high, the Fed helps banks makes lots of money. Thus, they can rebuild their battered and tattered balance sheets. Unfortunately, that means they are rebuilding their balance sheets on the backs of anyone trying to save money. Thanks, Ben.
If Gundlach is correct and we see falling rates on 10-year and longer-term Treasuries when QE II ends, then can QE III and QE IV be far off?
QE II, stocks & commodities
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For more on DoubleLine and Jeffrey Gundlach, see this post:
Disclosure: Kurt Brouwer owns shares in DoubeLine Total Return Bond Fund (DBLTX)