By Brianna Valleskey, Staff Writer, Benzinga:
Jeff deGraaf is the co-founder, chairman and head technical analyst at Renaissance Macro Research. Three weeks ago, his firm had a call that the 10-year bond market would trade under 2 percent.
While the call was for the end of the first quarter, the firm still got it within three weeks. DeGraaf recently joined Benzinga’s #PreMarket Prep to explain how that shows a clear pattern of falling bond yields when quantitative easing is terminated.
The Opposite Of Expectations
When looking at the history of ending quantitative easing, the result in the bond market tends to be the exact opposite of what the chart board would have suggested, deGraaf said.
“People would have expected that when the Fed, of all buyers – who’s not price-sensitive – comes into the market, you are absolutely going to end up with lower yield because they’re going to drive interest rates lower,” he said.
But deGraaf explained that the opposite usually happens because it puts people in a risk-seeking mode.
“And so, why not sell my bond – my safe assets – to a price-insensitive buyer and turn around and use that money to buy risk assets?” deGraaf explained. “Just the opposite happens as the Fed starts to exit those liquidity programs.”
The End of Quantitative Easing
He said that there’s no evidence from RenMac’s standpoint to suggest that this time when the Fed ends quantitative easing it will be any different.
“So, you ask me what I’m bullish on and maybe what’s sort of an outlier call, I’d still be bullish on the bond markets and bearish on yields,” he said. By Brianna Valleskey, Staff Writer, Benzinga
Maybe that’s how it ends: credit markets shut down, no more bonds, no more buybacks. Read… End of the Financial Engineering Market?
Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate “beer money.” I appreciate it immensely. Click on the beer mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.