FED TO BUY $300 BILLION OF TREASURIES - QUANTITATIVE EASING ALERT!

[Beet]

You must be logged in to read this quote.

What bond market dislocation in 1931? There were brief spikes in bond yields that year, but mostly in the corporate and municipal markets. The Fed responded to this mostly by raising the rediscount rate to staunch the export of gold. This was an exercise in defense of the gold standard, which was ultimately abandoned, resulting in an effective monetization of debt. Arguably the government should have abandoned the gold standard sooner, rather than raising interest rates. Bond yields fell throughout the 1930s.

[Beet]

Regardless, Bernanke's stated goal is keeping long term interest rates low in order to stimulate things such as the housing market, and the quantitative easing effect had a much more lasting impact on the dollar than it seems to be having on interest rates.

Corporate yields are way higher than they were earlier in the year, too, although they're still falling. I expect that to end soon.

Interest rates are always a tough nut to crack. It's not like stocks, where the higher the price the better it means expectations are. Nor is it like commodities, where you know higher price reflects higher economic activity, because short and medium term demand is more elastic than supply.

With bonds, there are really three components: the risk premium (of default) of the bond itself, the inflation expectation, and the opportunity cost (or the risk premium on alternative investments.) Any one of these factors may be driving any movement in bonds, but almost never is any one factor totally determinant.

One imagines 19th century physicists trying to break down an element into its protons, neutrons, or electrons, or Renaissance astronomists trying to break down the movement of the planets into gravitational pull, velocity, rate of change of velocity, and mass. You really need to look at things other than the rate itself to find out what is going on.