Another round of quantitative easing may have been widely expected. But that didn’t keep investors from running out of Treasuries and into riskier assets like stocks immediately after the Fed announced a third installment of bond buying Thursday.
Treasuries sold off sharply, pushing the yield on benchmark 10-year Treasuries up to 1.8% from 1.72% before the Fed’s announcement of so-called QE3. Yields on 2-year, 5-year and 30-year Treasuries also rose after the announcement.
The move out of Treasuries is a curious response from investors, since it flies in the face of what the Fed is trying to do with QE3: keep interest rates lower. For today at least, by selling out of Treasuries, investors seem to be expecting not just this round of quantitative easing but QE ad infinitum. Selling Treasuries illustrates that investors all over the world expect the U.S. central bank to remain as the buyer of last resort in the bond market.
Investors have been selling Treasuries lately, and driving up yields in the process. That move has coincided with a rally in stocks. Investors had been betting that the Fed would do something that would lead to a further rise in stock prices. Still, economists and market watchers said the Federal Reserve opted to take the most aggressive steps.
As part of its actions, the Federal Reserve said it would purchase mortgage-backed securities at a rate of $40 billion per month and will keep interest rates low through mid 2015.
“Of all the announcements the Fed could have made today, this is very nearly one of the most accommodative that could have been reasonably expected,” Dan Greenhaus, BTIG’s chief market strategist wrote in a research note.
