When demand increases prices go up, and when demand decreases prices go down. It's Economics 101 right? Well, not in the U.S. Treasury market.
The chart below shows the yield on the ten-year U.S. Treasury before, during, and after QE2. On 8/27/10, Fed Chairman Ben Bernanke first announced the Fed's plans to buy what would amount to $600 billion in U.S. Treasuries. When a new buyer of that magnitude comes into a market, you would expect prices to rise. However, in the ten months that transpired since the Fed first announced its plans, all the way to the final purchases of U.S. Treasuries on June 30th, Treasuries slumped, sending the yield on the ten-year up by 52 bps.
Heading into June 30th and the end of QE2, there were widespread fears that interest rates would spike sharply higher. In fact, in the days leading up to the end of QE2, the yield on the 10-year U.S. Treasury rose above 3% following a couple of days of strong economic data. At the time, there were some commentators on CNBC and other outlets pointing to the rise in rates as a canary in the coal mine for what to expect after June 30th.
So what happened after June 30th when the Fed stopped buying? Faced with the loss of their largest buyer and the potential for a possible default at the end of July, Treasuries rallied, sending yields lower by 24 bps. In fact, in the eleven days that have passed since QE2 ended, the yield on the ten-year U.S. Treasury has now given up nearly half of the yield increase that it saw during QE2.
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