Tags: QE3 | bonds | Treasurys | rally

Experts: QE3 Will Doom Treasurys Rally

Tuesday, 18 Sep 2012 11:30 AM

By Dan Weil

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The Federal Reserve’s decision to implement a third round of quantitative easing might put an end to the 30-year rally for Treasury bonds, experts say.

The thinking is that the Fed’s move to push long-term interest rates even lower will force investors out of Treasurys and into assets that offer the prospect of higher returns.

There is also some concern that the central bank’s move, which includes $40 billion of monthly mortgage-backed securities purchases, will spark inflation. In addition, the Fed announced no new purchases of Treasurys beyond replacing bonds as they mature, The Wall Street Journal reports.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

"We believe this policy is very negative for long-end Treasury paper," Richard Gilhooly, interest-rate strategist at TD Securities, tells The Journal.

In 1981, the 10-year Treasury yield rose to over 15 percent. The Fed’s slaying of the inflation dragon, among other factors, has brought the rate down to 1.79 percent.

But the move could be over.

"It certainly is not going to be like the '80s to now," star bond fund manager Jeffrey Gundlach said in a webcast last week, according to The Journal. "It's quite likely that interest rates are no longer going to be falling."

Already the 10-year yield has risen 41 basis points from its July record low of 1.38 percent.

To be sure, the sluggish economy still supports Treasurys. “Time brings in buyers as people recognize the growth challenges going forward,” Charles Comiskey, head of Treasury trading at Bank of Nova Scotia, tells Bloomberg.

“Given the fact that yields are as low as they are, when the yield goes from 1.50 to 1.80 percent it will attract buyers.”

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

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