Although in the long-term more quantitative easing may cause inflation to rise, in the short-term it should cause yields to fall. However, bond market participants in the last few days were selling bonds causing a rise in yields. Why would anyone, for example, sell a currency in the face of widespread expectations of central bank intervention to support it?
It may be seen from the daily chart of the 10-year note yields above that since the talk about another round of QE started in July and the ECB promised a bond buying program, the yield has risen close to 26 basis points from its low and closed yesterday at 1.76%, just 10 basis points below the double top of August, shown on the chart. Yesterday the yield rose sharply as the FED decision looms. But why selling debt just before the FED is going to start buying a lot of it, supposedly? There are a few possible explanations and, of course, their various combinations:
(1) The FED will not announce another round of QE
(2) The rise in yields is related to a possible further downgrade of US debt
(3) Bond participants are discounting a quick rise in inflation if QE3 happens
(4) Portfolio managers are selling bonds to buy stocks because they see a further rally
(5) Yields are rising because of factors we know we do not know
(6) Yields are rising because of factors we do not know we do not know
Obviously, (4) is the most optimistic scenario and (6) the most scary possibility.
Disclosure: no relevant position at the time of this post.
Charting program: Amibroker (Charts created with AmiBroker – advanced charting and technical analysis software. http://www.amibroker.com/”)