What Happens When Quantitative Easing Ends

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?

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  2 comments for “What Happens When Quantitative Easing Ends

  1. Michael Gorback says:

    It’s an interesting concept but with QE you had a buyer that was price-insensitive and not looking at the future value of money. It’s a different dynamic running the other direction when the prospective buyer is price-sensitive and expects lower bond prices.

    Having said that, I think treasury bond prices could go higher as a result of problems with the EU, Japan and China. Oh heck – why stop there? Problems with EVERYWHERE.

    There is no other market deep enough and liquid enough to absorb the massive amount of money that rotates out of risk assets during a panic.

    • dc.sunsets says:

      This makes sense to me.

      In a world drowning in credit-money (IOU’s, all), when the mood turns and the consensus changes from “everything is worth more today than yesterday” to “everything is worth less today than yesterday” there will appear to be money flows from market to market.

      In reality, since every market transaction is money-neutral because for every buyer there’s a seller, this movement of jello around the plate allows each stampede to lower the total value of each market being abandoned.

      Stocks will fall as the hive mind revalues its holdings there lower, and a fraction of that lost value will appear in the hive-mind’s valuation of Treasuries. Then the stampede will flow back to stocks (or commodities, etc.) lowering the value of bonds and raising stocks’ value, but to lower aggregate totals.

      In this way, the manic hive-mind valuations of all assets can stair-step downward and fulfill the full deflation of those credit-driven values to pre-mania levels.

      What the hive-mind gives, the hive-mind taketh away.

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