Bonds Sold Off When QE1 Started

I want to take a look at Bonds from a big picture level, because so much of the money flowing into risk has been the result of money being printed by the Fed. Here is a chart of the prices of US Treasuries of varying maturities – 30-year ($USB), 10-year ($UST) and 5-year ($USFV) –

What I want to show on this chart is how Treasuries performed during Quantitative Easing 1 (QE1). QE1 started in March 2009 (Green Line) and ended on April 1, 2010 (Red Line). You can see how Treasuries actually sold off as QE1 began, and then sat in a trading range for 11 months. I think this was the result of expectations of economic growth.

Treasuries literally bottomed on the day that QE1 ended. This tells me that the big boys knew that another round of QE would be needed to stave of economic weakness. You can see that Treasury prices shot straight up from April 1st until the next round of Quantitative Easing was announced (QE2) on September 1st.

So the obvious question is do Treasuries now sell off again on expectations of increasing economic activity?



The inverse of Bond Prices is Bond Yields (30-year ($TYX), 10-year ($TNX), 5-year ($FVX) calculate the yields by dividing these by 10). You can see how Bond yield spiked as QE1 started and then sat in a trading range. Yields then imploded as QE1 ended and now may be reversing back up. Past performance doesn’t guarantee future performance, but I am very would not be surprised to see yields rally on expectations or – a) economic growth or b) QE2 will not be as big as some hope it will be.



The US Treasury held an auction yesterday of the 4 ½ year TIP (Inflation-Adjusted Treasury) and the yield on the new TIP was -0.55%. That is right, it had a negative yield. This tells you that the bond market is anticipating Inflation that far outstrips the yield on the non-TIP Treasury with the same maturity.

It is the first time in history that the TIP has had a negative yield in an auction. With Bernanke now instructing the Fed to target 2% (more like 3-4%) Inflation, people are willing to take a loss to get better long-term yields. I think the negative yield is a bit of an overshoot and may mark a low point for yields.

Here is the daily chart of the US Treasury (ZB Z0-D) with support and resistance levels included. You can see that the Treasury has had a decent pullback. It is in a downtrend and testing support.