Friday, April 22, 2011

Treasuries rose for a second week as investors speculated that efforts to cut the Federal budget deficit may damp economic growth and
awaited a policy statement next week from the Federal Reserve – Bloomberg

I know this is a busy chart but if there is one take-away, it is what happened after 3/31/10: QE1 purchases end  bond prices are bid up  yields
fall. Shouldn’t bonds have sold off as the largest purchases (the Fed) left the market? Prices rose and yields fell because investors were pricing in
a lower growth environment. Note also that after QE1 purchases began, bonds sold off and, consequently, yields rise because QE purchases
boosted growth estimates.

It is a very real possibility that when QE2 purchases end in June, growth estimates are taken down as monetary policy moves in a tightening
direction. If the past two years are any guide, that would mean yields roll over. The most likely scenario? Yields are capped at 4 with a floor
around 3…a break above four is probably met with tightening (slowing growth) and below three  more QE (increasing growth).