Courtesy of Lee Adler of the Wall Street Examiner
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From mid November 2012 just before the Fed began to settle its QE3 MBS purchases to the date of the current statement, SOMA has grown by more than $800 billion.
Meanwhile the yield on the 10 year Treasury rose in a sawtooth pattern from a low of 1.59 in May 2012 to a high of 2.90 on August 19, 2013. Has QE pushed long term rates down? Apparently not.
The evidence strongly suggests that QE was not effective in suppressing long term interest rates. I saw and reported at the time US long term interest rates were falling, that Euro capital flight was the driver. Each time the European crisis flared up, money flowed out of Europe into the Treasury market, simultaneously causing US bank deposits to soar while European banks saw outflows. Exacerbating those flows was the fact that the flare-ups of the crisis triggered massive ECB lending to the banks, which only increased the flows into Treasuries as the banks took that money out of Europe and bought Treasuries.
Then in January of this year the ECB opened the window for allowing repayment of the emergency LTRO funding program of late 2011 early 2012. The money flows into Treasuries reversed when the Treasury carry trades that that cash had funded began to be unwound. The chart below illustrates both the impact of the ECB funding on the trend of Treasury prices, and the lack of impact of the Fed’s QE, which apparently was mostly funneled into US equities. The trends of the ECB’s balance sheet and Treasury prices correlated closely. The Fed’s balance sheet trends and Treasury prices did not correlate at all.
Fed, ECB, and Treasury Prices – Click to enlarge
Deleveraging in conjunction with banks unwinding the Treasury carry trade using the ECB’s LTRO funding seems to have been at least the catalyst, if not a driving force, behind the selloff in Treasuries and the rise in yields.
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