E Everyone Said Treasury Bond Yields Would Go Up After QE Ended

Before I show why they have been wrong, I am going to cite some celebrated economic pundits who said that the long bonds would go up in yield after QE. After all, they thought they had it right.

And you will be surprised to know that some of them may have wanted you to panic and sell your long bonds. In some cases, it is likely that their financial buddies in high places needed those bonds, desperately. I am not accusing any of the article builders below specifically.

But talk about a bond bubble circulated in media with a lot of force, like ideas do when they are paid for. One wonders if China was listening to the talk before unloading treasuries? That is pure speculation on my part. Or perhaps China was testing the liquidity of the bond market, which worked out just fine.

But it turns out, the little blip of rising long bonds went away. The 10 year is barely above 2 percent and the thirty year is still under 3 percent. And central banks everywhere have backtracked.

So, before I show why the pundits were wrong, here are some of their statements:

1.The Guardian said of course the interest rates for treasury bonds will rise.

2. Harry Dent wrote an article entitled The Beginning of the End: Rising Long Term Rates.

3. USA Today said that there were reasons that the long bond was on the rise. But that didn't last.

Admittedly, one fellow cited by USA Today said that any rise in yields would be cyclical, and rates would stay low for a long time.

4. Bloomberg talked about taper tantrums where interest rate yields accelerate.

5. The Street spoke of reverse taper tantrums where interest rate yields go back down.

6. OMG, FT spoke of a triple taper tantrum. 

FT was convinced of big growth on the way. Certainly, without significantly higher yields on the long bonds, the middle class won't get as many loans for houses, unless we are in bubble territory, and so the big growth would only be limited to the elite.

But that is what happens when you have massive demand for long bonds, even after QE. That is the secret of letting QE end, that bond demand for collateral in derivatives markets is massive. Even if growth was stronger than green shoots, it still would not force long yields up.

Historically, growth would mean people would leave bonds for stocks as prosperity blossomed. But, historically, there did not exist a 700 trillion dollar, give or take a few trillion, derivatives market creating artificial demand for government bonds 24/7!

8. PBS spoke of Krugman versus Rogoff and Reinhart and Stockman, the three boys who cry "wolf" continually by saying interest rates will skyrocket up soon. Krugman is not giving away the semi-secret of derivatives demand, but he is amused and commented that those other guys act like the Japanese, who have been warning and crying wolf for 20 years! 

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I am not an investment counselor nor am I an attorney so my views are not to be considered investment advice.

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Gary Anderson 5 years ago Author's comment

Author note: Even with banks artificially goosing yields based on the new auction lawsuit as reported by Bloomberg, yields on long bonds are low and actually should be LOWER.