The Book of Threes

Rosenberg Presents The Three Ways Bernanke Disappointed The Market, And Why It Is Dumping

As for the fixed-income market, the big news was the size of the OT program ($400 billion versus market expectations of $300 billion), but the bigger news was that the switch was not merely going to be in the 7-to-10 year part of the Treasury curve — in a real ‘twist’, it will also include the long bond, as mentioned above. What the economic benefit of this will be is really anyone’s guess, but it is making long duration bond bulls ecstatic. The yield on the 30- year Treasury bond has fallen all the way down to 3%, but it is the only maturity that has yet to make it all the way down to a new cycle low; there is still nearly 50 basis points to go before the December 18, 2008 interim trough of 2.53% is tested (back then, the recession was largely behind us, not ahead of us). While the “bond” may look overbought right now on a technical basis, there has never been a time when yields bottomed before the recession even began.

Besides, a normal curve from overnight to the long bond is around 200 basis points, so to see an eventual retest or piercing of that 2.53% close of 33 months ago is not out of the question. We should add right here and right now that 30-year German bund yields are now at their all-time low of 2.46% and they don’t carry nearly as well as Treasuries. The yield on 30-year JGBs are now at 1.9% and in Switzerland the long bond yield is now 1.2%, added evidence that a further dramatic rally in the long-term Treasury is far from a radical viewpoint.

The mortgage market also got a bit of help today — though likely not much — from the Fed’s move to reinvest the principal payments from its maturing agency debt and agency MBS securities into agency MBS (instead of Treasuries as it had been doing).

All in, quite a tepid response to an economic outlook that now has “significant downside risks” when benchmarked against what was priced into the stock market. But there still were three dissenters and the tone of the press statement suggests that the meeting was a lively affair and not short on compromises (the FOMC minutes will be released on October 12th). If there is a surprise, it is the inclusion of the long bond in the program. At the margin, this was a backhanded signal that, sorry, this was not Step One with Step Two coming any time soon as it pertains to further monetary policy intervention in the marketplace. And when you look at the chronology of events — taking rates to effectively 0% in December 2008; embarking on QE1 in March 2009; moving to QE2 in November 2010; and now this Operation Twist resurrection, it is abundantly clear that the Fed has moved from cannons to shotguns to water pistols.

Source: Gluskin Sheff

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Three is the Magic Number

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