Wednesday, August 10, 2011

The Fed's AE Causes Negative Real 10-Year Yield

There was no new round of "quantitative easing" from the Fed. The Fed did however implement what one could call "pledge easing" or "anticipation easing"(AE), by specifying in its statement that they would keep the Fed funds rate low until mid-2013. As a result, treasury yields fell sharply while the stock market rally (the latter has now partly been reversed).

The effect of this has thus been similar to what would have happened if there had been a new round of quantitative easing.

One interesting fact is that not just that the inflation-indexed 5-year Treasury but also the inflation-indexed 10-year Treasury has a negative yield. The spectacle of investors voluntarily paying the U.S. government to borrow is disheartening.


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