An Investigation Into The Market's QE Expectations
In the past, we have digested in painful detail the theoretical impact that QE will have on equities (initial euphoria and long, hard leg down), rates (constant drop in yield to zero as Fed is forced to not only buy up every piece of government paper, but to outright monetize auctions), and on the monetary system in general (the beginning of the end for the dollar). Yet the practical impact of QE always ends up being something very much unpredictable, and is what happens when the market is making other plans. Which is why the following piece from Shadow Capitalism, titled, "A delve into the current discounting of QE expectations and its market implications going forward" is particularly useful reading for those who wish to determine just how the market participants are evaluating the impact of QE2 in practical terms.
Quick note: we disagree with the TMM assumption that excess reserves can be discounted using 1 Year rates, as this is a shotgun assumption, and has absolutely no bearing on the key question brought up yesterday by Morgan Stanley, which has to do with where on the curve the Fed will be purchasing - after all, excess reserves are the effect of the purchase, while the cause is the presence of a biddable Treasury. Furthermore, yields have lower bounds, while the liability side of the Fed's balance sheet is, in theory (and in hyperinflationary practice), endless. Furthermore, it is not the banks' balance sheets that will be gating factor, but the supply of Treasuries in the open market (and at auction), that will be the determinant of the S/D curve interception during the QE2 regime.
A delve into the current discounting of QE expectations and its market implications going forward (pdf)
- advertisements -