Deutsche On QE3, It's $800bn Or Bust!

Tyler Durden's picture

Buried deep in the 137 pages of Fixed Income 2012 Outlook, Deutsche's bond group looks at the implications of an extremely flat US Treasury Curve and implicitly low bond risk premium. Based on 5Y5Y rates relative to long-term growth and inflation expectations, tail inflation risks, and estimates of supply/demand shocks, the current bond risk premium are at levels that were witnessed ahead of the bond market sell-off of 1994, at the peak of the bond market conundrum of 2004-2006 and around QE announcements. This 100bps or so of 2s10s 'flatness' relative to real short rates and expected deficits also corroborates this risk premium. So what does this tell us? The extremely low risk premium fully captures QE expectations. Empirically, they find USD19bn of new QE tends to reduce real rates by 1bps and based on this and a model of fundamentals and risk aversion parameters, they find that Twist was fully priced in last September and since then the current dislocation suggests another full QE2-style package of about $800bn is already priced into the market (ex MBS reinvestment). We just hope the market is not disappointed.

Via Deutsche Bank's 2012 Fixed Income Outlook

A low risk premium

We estimate the risk-premium using two orthogonal techniques. The first technique consists of estimating a 5Y5Y bond risk premium by modeling the 5Y5Y rate relative to long term growth and inflation expectations (as per Consensus Economics), tail inflation risk (as captured by the skew in the SPF’s long-term inflation forecasts), and the correlation between growth and inflation (which captures the supply vs. demand shocks to the economy).


The graph below shows that the risk premium is currently particularly low and at levels that were witnessed ahead of the bond market sell-off of 1994, at the peak of the bond market conundrum of 2004-2006 and around QE announcements (see chart below).


The second technique consists of estimating the risk premium in the slope of the curve by modeling the UST 2s10s slope as a function of real short rates and expected deficits. This model corroborates the conclusion of the 5Y5Y risk premium model: the curve is too flat by about 100bp.

The low risk premium fully captures QE expectations

The low risk premium could be interpreted as the pricing of potential additional QE. We estimate the QE3 amount implied by the current level of 10Y real rates by modeling them as a function of the fundamentals (US economic surprise index) and risk aversion parameters (VIX and SovX WE).

Analyzing historically the reaction function of real rates to QE announcements, we find that USD19bn of new QE tend to reduce real rates by 1bp. Based on this estimate and on the model dislocation, we find that the 10Y real yield was fully pricing in Operation Twist in September and that since then the dislocation has increased to price in another full QE package, similar in size to QE2, of about USD800bn (excluding reinvestments of maturing agency and MBS holdings).

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GeneMarchbanks's picture

Since DB is a PD, I'm sure the Bernank will lend an ear. DB needs to be nationalized by the few sober Germans left as it seems now they are just nonsense merchants.

theMAXILOPEZpsycho's picture

The way I see it is that Ben Bernake has played the economy like a master pianist, or like a master of the art of cunnilingus leaves a woman screaming in unbearable ecstacy. First he injects huge liquidity into the system to save the fragile banking sector and reignite a retail and housing boom. Of course by doing this it looked to the untrained eye as though he was sacrificing the dollar; yet these people are like poor chess players who can only think one or two moves ahead. Bernank is a grand master who saw the end game from the opening moves; problems in Japan and europe as well as a hard chinese landing, therefore the huge run towards US dollar and T bills as the ultimate safe haven. While people buying gold and silver have seen their life savings eroded. People should be thankful to his foresight and crafty maneuvering - in effect we've all been showered with free money from heaven!

AldousHuxley's picture

Too much TV brainwashing....Krugman is NOT your enemy. He is anti Phil Gramm, anti Greenspan, anti Erin Burnett, anti Hank Paulson, anti Obama. He may not be perfect and somewhat partisan, but they don't give Nobel prize (except peace) to corrupt elitists.


If there are 2 guys I'd blame for this crisis, it would be in order Alan Greenspan and Phil Gramm

5:00 mark


Back in 2008....

Obama doesn't have a clear plan to fix economy


Again in 2008...

On Hank Paulson's bank bailout..."cash for trash"

if the government is going to provide capital to financial firms, it should get what people who provide capital are entitled to — a share in ownership, so that all the gains if the rescue plan works don’t go to the people who made the mess in the first place.

Mr. Paulson is also demanding dictatorial authority, plus immunity from review “by any court of law or any administrative agency,” and this adds up to an unacceptable proposal.

if this plan goes through in anything like its current form, we’ll all be very sorry in the not-too-distant future.


Back in 2006 on housing bubble...

If history is any guide, housing got a long way to fall, and the industry is going on a long drought

If you look at effect on consumers who have been using the house as ATM....You are looking at a hit to the economy, that is as big as  what happened to the stokc market in the 90s. gotta say it is in the range where serious slowdown is likely.....this is scary.

unemployment will rise above 6%...

most people have not seen any income gains



On Bush administration in 2003

There is no economic policy. That's really important to say. The general modus operandi of the Bushies is that they don't make policies to deal with problems. They use problems to justify things they wanted to do anyway. So there is no policy to deal with the lack of jobs.


On Fed and bubbles in 2002

The basic point is that the recession of 2001 wasn't a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan would need to create a housing bubble to replace the Nasdaq bubble.


And Greenspan did exactly that....bubble after bubble...


r00t61's picture

Sorry, but anyone who actively, openly, and publicly endorses inflation as a policy tool is the enemy.  Including Paul "Just let the aliens invade so that we can rebuild with a huge stimulus; broken window fallacy be damned" Krugman.

AldousHuxley's picture

hyperinflation is terrible, but 2% inflation is motivation on the super rich so that 3 generations of Paris Hiltons don't sit on their ass living off of Tbill dividends without having to care about allocation of their wealth into productive usage. It is only when Fed abuses that power and creates 5%+ inflation like they have. The complain against Fed is not the booms but bubbles. But Fed does so because elites are not letting Fed to be the only solution while they got their mouth open right at PDs before any working class can benefit.


Alien quote is taken out of context. He was mocking the general populace and DC's lack of understanding of how bad the economic fundamentals were. We had the buck break. sheer panic back in 2009. People were questioning the concept of money itself! He compared this to world war II stimulous. Basically the world is having huge demand problem that only alien invasion and world war would save the economy.......what do you think drones in Iran is all about? WAR = artificial demand stimulous.


What's needed is (1) money going to working middle class to stimulate demand (2) get the bad guys who are holding middle class hostage out. Krugman has the fundamentals right that working middle class needs a boost. What he has to communicate is how to achieve that without all the rewards going to the elites.

Currently with this supply side bullshit any time you print money it first goes to the bad guys: stockholders, banksters, then to CEOS.... and only trickles to workers if they are employed. How can you lower home prices without increasing employment? How can you prevent banksters million dollar bonuses without main street starving for capital? Answer: FISCAL POLICY....but politicians still are beholden to the billionares and dont' want to chagne fiscal policy...they are using FED's MONETARY policy to try to stimulate demand. Even Bernanke keeps pointing fingers at congress to do something instead of having his keep printing money. THE PROBLEM IS CONGRESS, especially the SENATE where shithole undereducated states are overrepresented. Even lower rating than Obama.


They got Mitt Romney (born on 3rd as son of CEO) ready to make sure FISCAL POLICY doesn't change so that workers work harder to increase productivity while wage gains remain flat. What do you expect when capital gains tax < working income tax? More money redistributed to capitalists versus workers and anytime Fed prints, they subsidize capitalist's risk while worker's income growth is eaten up by inflation. Well after 30 years, boomers are old, broke, and drowning in debt.


We all know who caused the problem and government has the power. BUt why don't they do anything about it? Becuase CONgress IS THE PROBLEM. Representative at least try to pass some bills, but they are all rejected by the senate. A lot less senators to bribe.



AldousHuxley's picture

on a separate note ...Krugman is not passing laws to make corporate personhood, elimination of your rights to due process (aka. habeas corpus) , etc. which Obama at least publically reprimended.


Detention under the law of war without trial until the end of the hostilities authorized by the Authorization for Use of Military Force.

93% of your senators voted for it....


r00t61's picture

Krugman is just another Ivory-tower money-printing fanatic.  He's the worst kind of statist: "Your coercive central state theories are bad; however, mine are great, mostly because I have this PhD behind my name."

Krugman thinks that the economy is a big black box with levers on it; a tweak here, a tweak there, I am the supreme technocrat, coo-coo-ka-choo.  In real life, the economy is not rational, it's not deterministic, it's not even a chaotic system.  Krugman, like most mainstream economists, tries to pretend that his field is a hard science, like physics or chemistry, when it's little more than a social science, like psychology or sociology.

Krugman complained about Iraq when Bush was in town; strangely silent on criticizing Obama though.

I'm supposed to put up with endless inflation so that it prevents rich heirs and heiresses from getting to sit on their butts?  Guess what, dumbass, they already do sit on their butts.  The effect of inflation on rich people is the most miniscule of annoyances.  It's like having to kill an extra mosquito every summer.  Conversely, the effect of inflation on, say, fixed-income seniors, is them buying cat food in bulk and turning the heat off in the winter.  My God, you must be dense.  I wish ZH had the old karma system back so your ridiculous comments could get nuked into oblivion.

economics1996's picture

If Krugman wants money to the middle classes then he should support ending the Federal Reserve.

Libertarian777's picture

sorry 2% inflation? where'd you see that. Last I checked even official inflation was running north of 3.5%

Who gives a shit if Paris Hilton sits on her ass, a fool and their money are soon parted. Sure its nice to be born with a silver spoon, but there's a saying in Chinese that states wealth doesn't last past 3 generations (naturally there are exceptions but as a general rule it rings pretty true).

Inflation DESTROYS the lower/middle classes. At 4% inflation a year the value of your earnings is HALVED in 17 years. And inflation is running at 11%+ if you use the 1980 methodology of calculation ->; and remember how EVERYONE was complaining about high inflation in the late 70's early 80s. At 10% inflation in SEVEN years the value of your money is HALVED, and you wonder why the middle class can barely afford to send their kids to college?

So think about poor people, they struggle to get even a small increase in the minimum wage (I don't support minimum wage laws but that's another topic). If you're poor and you're earning minimum wage and can save just $1, if there was no inflation or better yet DEflation, then in 17 years time that $1 can buy you MORE than today, instead of your $1 being saved and earning NOTHING and buying you 50c in 17 years time.

Which of the two ways will help the poor people dig themselves out of poverty? inflation sure as fuck won't.

economics1996's picture

Nobody pays attention to Krugman.  He's a nut case.

GeneMarchbanks's picture

That is some master trolling right there. Kudos. I especially enjoyed your opening sentence:

'The way I see it is that Ben Bernake has played the economy like a master pianist, or like a master of the art of cunnilingus leaves a woman screaming in unbearable ecstacy.'

Sadly for him, it is the desire of boys to please women, and not of men:

I'm sorry, it's just science...

hardcleareye's picture

Depending on your view of the drug industry and the "unbiased data" used in the study,(are the results reproducable in other studies???) this could make the case that BOYS and man-boys should receive the Gardasil vaccine.

By the way a man worth keep is one who knows how to please his women......  

GeneMarchbanks's picture

Obviously you're a vagina owner, presumably somewhere in the so called 'developed' world which really just means a technology dominated society whose favorite pastime is consumption. Drug industry led and biased? Probably. My point remains. Arguably, no one is suffering more from present day conditions than women. And you really can't blame them. Men 'please' women simply by being men, and not by trying to 'please/pleasure' them. All this is lost on a society that worships infantilism. Bieber is the future.

falak pema's picture

If you had to choose between a man with a hard dikk and a soft head vs a man with a hard head and a soft dikk which would you choose? I know what a man would like you to say, but a woman is such a mystery, she can make a man do anything with his head. But thats my experience ...she can even work miracles on soft appendices; that's what they say about women... your move.

Oh regional Indian's picture

Gah! That cunnilingus visual was pointless and tasteless and probably has never happened. Yuck.

But it's none of these actors.

And QE3 is ongoing. It's called Operation twist.

Between interest rates, currency rates, pm rates and oil prices, it's advantage Moneymasters, every step of the way.

This system has to collapse. Even Jim Willie agrees with me. No way out. If you fight it, A Christopher Story awaits you , if you know what I mean.



jekyll island's picture

I agree ORI.  I consider Twist to be QE3, so next round of easing will be QE4, on our way to QE to infinity. 

Interesting Troll comment about Gold and Silver eroding savings, must be a momentum chaser, my position is still up over 100%, even after the recent manipulations. 

 Troll comment about deflation, and I am probably giving him too much credit, is accurate.  The credit bubble is deflating which does increase the purchasing power of the FRN$.  Do not know how long that will last, since QE is used to fight deflation and resulting bank runs.  So it is reasonable to have some cash to hedge this position, just need to be willing to pull the trigger to use it to buy real assets when they go on sale. 

J 457's picture

WTI dropping will become a set-up for additional easing.  But, if Congress somehow intervenes and blocks any QE efforts, silver and gold will drop.  Question is; when to buy more gold/silver?  I've been watching and waiting but fear we're still going to see another 10-15% drop before it turns up- and that rise predicated on more QE.

Western's picture

"But, if Congress somehow intervenes and blocks any QE efforts, silver and gold will drop."


If you're implying gold and silver have been going up based on QE and QE expectations, you're wrong. They might drop because a few short term nancys may be missing out on an expected swing trade but that's it, I don't see them going down if there's no QE.

J 457's picture

I think gold and silver did go up based upon QE and fear of further inflation.  The other variable is a complete USD or EUR collapse, which if that happens then PM is the place to be. 

Sam Clemons's picture

I agree with the ORI on this.  I'm amazed at how the perception has become that we need to monetize debt (fancy way of saying let the government borrow and spend money into existence) is the solution.  We are reaching the evolution end game for fractional reserve banking, central banking, and fiat.

s2man's picture

What? My life savings were not eroded by investing in PMs.  I made 135% in silver and 40% in gold in the last two years.

Libertarian777's picture

or as Ron Paul says, MONEY is a unit WEIGHT. It doesn't actually make sense to price it in FRNs, except for the fact that that is how the current financial system works.


Throughout history though money has always been a unit weight. Money substitutes (certificates) would denominate a unit weight. Ever wonder why the brits call their currency a 'pound' (weight) or 'sterling' (fineness), or how the 'dollar' (thaler) came about? they were all unit weight coins.

So technically in real money terms you've made 0% in the last 2 years.

Freewheelin Franklin's picture



I was looking for the "[/sarcasm]" tag, but I didn't see it, so I "junked" you.

economics1996's picture

Yo.u are full of shit.  Bernanke has had shit stains since 2006.  He is full of shit and his only playbook is Freidman and Schwartz.

CosmicBuddha's picture

"in effect we've all been showered with free money from heaven!"


No, we have been hosed with unwanted monetary units from hell. You may like to have the fruits of your labour diluted to backstop the feckless and fraudulent, but I don't.

flight77's picture

Could you please explain the term "PD".

youLilQuantFuker's picture

Not important. All you need to know is DB is the Seal Team 6 of the global financial system.

GMadScientist's picture

If you mean dead from a helicopter crash, then yes.

youLilQuantFuker's picture

Elite, best of the best. Able to score big behind enemy lines. Brings home the bacon. Fries it in the pan soldier! Ohrah!

GMadScientist's picture

Able to freeze their balls off in cold water.

Gimme a nice comfy dry suit and nitrox tank any day. ;)


flight77's picture

What does the term "PD" means? Thanks for answering!

GeneMarchbanks's picture

You just said that in bold. PD refers to Primary Dealer status:

Manthong's picture

PD's are Peremptory Defalcators no matter what the Fed says.

AldousHuxley's picture

PD = primary dealers


as opposed to retail banks like fifth third national bank of this and that who get money from PDs.


they get the FED cash fresh and hot off the printing presses


PD taken out like Lehman and MF Global is pretty significant event mass media doesn't want you to know.

CORNGUY's picture

Can any ZH'ers tell me where this is?   Maybe Im still drunk, but I couldn't figure it out.

youLilQuantFuker's picture

I'm pretty sure that's NYPD @ occupy jewyorkcity.

I could be wrong, but it looks to me like USSA.

Potemkin Village Idiot's picture

Looks to me like it's a training reel for how to treat anyone who posts "unapproved" links to blogs...

Part 2 is what they do to you in Gitmo...

scatterbrains's picture

fk'ing disturbing..  How did google let this out ? Or is this going to reach epic distribution just before we launch into Syria ?

Philligan's picture

That is Egypt and from this weekend

bullionbaron's picture

In my opinion we'll see QE3 in 2012 and it will be the driver of the 3rd/bubble phase in the Gold bull market:

spiral_eyes's picture

there is only one real bubble, and that is benny's magical paper. gold was valuable a long time before 1913, and it will be valuable for a long time after the end of the fed.

s2man's picture

I read the article and agree, BB.  The bankers can not allow, or survive, debt cancellation or asset depreciation, upon which their loans are based.  So their choice is inflation.

WonderDawg's picture

Sure, their choice is inflation over deflation. The question is, given the magnitude of the debt bubble that is imploding, can they keep it inflated? I personally think not, it is too massive and as it collapses will overwhelm their efforts and the bond markets will have the final say. So, will they get what they choose or will the markets decide what happens? Time will tell.