Quantitative easing and the (lack of) responses in bond yields24 June, 2012, 18:52. Posted by Zarathustra
One of the biggest misconception in the market has been that quantitative easing pushes treasury yields down, and operation twist push long-term treasury yields down (to twist the yield curve, so to speak).
Perhaps that is the purpose of the Federal Reserve, on the surface at least, but data do not confirm that the Fed’s easing contributed to the fall in Treasury yields. Indeed, when the Fed was performing quantitative easing, treasury yields rose as the economy recovered and inflation expectation rose. On the other hand, treasury yields fall when the Fed was not performing quantitative easing as the period without quantitative easing coincided with the weakening of the economy as well as the deterioration of the Euro Crisis. This appears to be the same for operation twist (although somewhat less obvious here), as it did not really push long-term yields down meaningfully. However, the recent escalation of the Euro Crisis has helped to push long-term yields lower.