27 Sep 2013
Flash: US faces QE 'trap' - Nomura
FXstreet.com (Barcelona) - The Fed's inability to commence an exit strategy for its QE program in Sept, according to Richard Koo, chief economist at Nomura Research Institute, "underscores the severity of the problems involved in winding down QE" he says, a problem that has led to US long-term rates under strong upward pressure again.
Key Quotes
"The magnitude of QE coupled with the Fed’s decision to supply funds by buying longer-term bonds means that winding down the program will place substantial upward pressure on long-term US interest rates."
"The 10-year US Treasury yield climbed to 3.0% after Mr. Bernanke indicated in June the mere possibility of a scaling back of the Fed’s asset purchases. The fact that rates rose so sharply after the Fed merely mentioned the possibility of trimming its buying suggests that interest rates might climb much higher if the Fed actually began to sell off its massive holdings of long-term bonds."
"Instead of falling back to 2.0% or lower following the Fed’s decision to delay tapering, the 10-year Treasury yield has settled at around 2.5%, which means the next rise in rates could easily take the 10-year yield into 3.0%-plus territory."
"I worry that this kind of intermittent increase in rates threatens the recoveries in interestrate-sensitive sectors such as housing and automobiles. That could lead to renewed hesitance at the Fed and prompt it to temporarily shelve or postpone tapering."
Key Quotes
"The magnitude of QE coupled with the Fed’s decision to supply funds by buying longer-term bonds means that winding down the program will place substantial upward pressure on long-term US interest rates."
"The 10-year US Treasury yield climbed to 3.0% after Mr. Bernanke indicated in June the mere possibility of a scaling back of the Fed’s asset purchases. The fact that rates rose so sharply after the Fed merely mentioned the possibility of trimming its buying suggests that interest rates might climb much higher if the Fed actually began to sell off its massive holdings of long-term bonds."
"Instead of falling back to 2.0% or lower following the Fed’s decision to delay tapering, the 10-year Treasury yield has settled at around 2.5%, which means the next rise in rates could easily take the 10-year yield into 3.0%-plus territory."
"I worry that this kind of intermittent increase in rates threatens the recoveries in interestrate-sensitive sectors such as housing and automobiles. That could lead to renewed hesitance at the Fed and prompt it to temporarily shelve or postpone tapering."