Tuesday, July 12, 2011

3-year Note Auction Today: Lowest Rate Since BEFORE the Fed's QE2

Today's high rate at the first 3-year Treasury Auction since the end of the QE2 resulted in the LOWEST 3-year note yields since before the start of the Fed's QE2 back in mid November 2010. Below is a Table of the dates of all of the 3-year auctions for the subject time period and the high rates for that date.

7/12/2011 0.670%

QE2 ENDS 6/30/2011

6/7/2011 0.765%
5/10/2011 1.000%
4/12/2011 1.280%
3/8/2011 1.298%
2/8/2011 1.349%
1/11/2011 1.027%
12/7/2010 0.862%

11/8/2010 0.575%

So the empirical data suggests that the Fed's QE2 operation raised the risk free interest rate for the 3-year point of the term structure. This is the opposite of what we are typically led to believe concerning the Fed's QE2 project, that is, that this Fed program lowered interest rates out the term structure. The data says otherwise.

Maybe businesses and households can now enjoy lower financing costs now that the Fed has finally exited the Treasury market.


Mario said...

my gosh that is just so ironic I can't even laugh about it.

Matt I love your treasury stats stuff. They say seasonally that bonds are always very bullish in late July through August, which funnily enough is typically when we see a dip in equities before the fall and x-mas rally...we shall see what happens this year with the whole "debt ceiling" nonsense on Aug 4th.

Mario said...

it's also fascinating to get a glimpse into just how huge and powerful the markets really are...not even the Fed can truly "manipulate" the markets. Personally I find the markets an incredible social phenomena that seems to truly epitomize the concept of synergy where something is greater than the sum of its parts. Just fascinating to me.

Jim Baird said...

Mario -

The Fed can "maniplulate" the markets any way it wants, but the people in charge seem to have no idea how to do it. All they need to do is set a rate and let quantity float (like they did during WWII). But the whole idea of trying to buy govt paper to force rates down was never going to work, and any first-year economics student should have know it...

Mario said...

right I agree with you they could do a QE3 type scenario and that would work (and apparently the FOMC minutes yesterday show a few officials are thinking of doing QE3 too), but I am referring to the Fed as a just another "normal" market participant buying and selling like anyone else in the market. It just seems that you can't fake the real trend in the end, no matter how big you may be and no matter how much "noise" you throw at it. That's pretty cool to me.

Matt Franko said...


During most of the QE2 (until the debt ceiling hit at the end of may)

The Fed was buying all of the net new issuance of Treasury securities. So it would be like a big oil Co like Exxon Mobil buying ALL of the new oil taken out of the ground.

Mike blogged about this at the time:

"The Fed is buying "scale down" and in effect, causing the selloff. They're doing this because they're fixated on quantity ($600 bln) as opposed to price (interest rate). I remember when I was a floor trader. I had clients in the oil business--big firms--who would sometimes want to protect a certain price. They'd give me an order that would be, "Buy 100 (crude), 'worst.'" That meant buy it up...aggressively. When Japan used to actively intervene in FX markets, they wouldn't scale down their dollar buying (or sell yen scale up), they'd buy dollars aggressively to put the USD/JPY exchange rate to a certain level. The Fed is not doing this. By signaling to the market that they will buy scale down, they are actually creating this selloff as nervous longs look to sell before the largest buyer lowers its bid again and as speculative shorts compete for a better price."

The Primary Dealers could probably game this to make a lot of money by shorting bonds in front of this Fed activity....