Quantitative Easing

March 6, 2012 by staff 

Quantitative Easing, That is certainly the conclusion of the financial markets. When Federal Reserve chairman, Ben Bernanke, failed to mention the magic words in his House Humphrey Hawkins testimony on Wednesday, risk assets were sent into a tailspin. Gold suffered a $100 move plunge in hours, the futures market seeing an almost instantaneous liquidation of $1.3 billion worth of contracts. Silver dropped 10%. Oil gave up $3 in a heartbeat.

What was truly impressive was the collapse of the Treasury bond market, which saw yields for the ten year leap from 1.92% to 2.05%. When a single order to sell 100,000 bond futures contracts worth $10 billion hit the market, many thought that a major firm had committed a grievous ‘fat finger” error. But the “cancel and correct” never came, and the trade stood. Clearly, a major hedge fund was betting that the 30 year bull market in bonds had peaked and moved to add some serious downside exposure.

The reason that I missed the extent of the serious rally in risk assets this year is that the current wave of quantitative easing was so paltry. One €500 billion tranche in December followed by a second on February 29 is only a fraction of the tsunami sized liquidity the Fed’s previous QE1 and QE2 unleashed on the markets.

In any case, most of this cash stayed in Europe, with the banks bidding up sovereign bonds in a frenzied manner to capture a massive positive carry. Italian 10-year yields collapsed from over 8% to under 5% in weeks. As expected, none of the dosh made it into the real economy where it could do some actual good. But traders have developed a Pavlovian response to the words “quantitative easing”, which instantly triggers a rush of buying of all assets everywhere, as it has done in past cycles.

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