Treasury Yields Plummet on Surprise Continuance of QE3

Jacob Harper |

Markets had been bracing all summer for an expected “tapering” of the Fed’s $85 billion a month bond buying program known as QE3. In turn, treasury yields had touched on a two-year high, as analysts widely speculated that the Fed would begin scaling back bond purchases by $10 to $15 billion. On Sept 18 the Fed announced that wouldn’t be happening, and treasury yields plummeted in kind.

The quantitative easing program has kept interest rates artificially low as a way to spur the economy. While many signs had pointed to an overall economic rebound, and thus a solid reason for pulling back government stimulus, the Fed got cold feet and ultimately decided to keep injecting money into the economy.

“Conditions in the job market today are still far from what all of us would like to see,” Chairman Ben S. Bernanke said at a press conference explaining their decision. Bernanke is referring to both jobless claims, which have been on the rise as of late, and an ongoing battle between President Obama and Congress over the budget that could paralyze the government. House Republicans are still incensed about the implementation of the Affordable Care Act, and are threatening to cut funding for the revolutionary legislation or push the country off another “fiscal cliff.”

Ultimately, the Fed erred on the side of stability, and decided to keep QE3 chugging along as normal. The market effect was palpable and immediate. Gold spiked, as did the stock market. And as expected, US Treasury yields lost significant value. 5-year yields dropped from 1.62 percent to 1.43, and 3-year from .78 to .67.  

All yields had been rising in expectation of the taper, with the ten-year note flirting around 3 percent before settling at 2.85 percent on Sept. 17. With the Fed announcement the following day, the yield dropped to 2.69 percent, or 5.7 percent of its value.

Analysts adjusted their view of yields going forward in light of the Fed's decision. Notably, Barclays cut their forecast for the year-end on the 10-year note, from 3.15 percent to 2.8.

Treasury yields had been rising as traders sold bond holdings in preparation of the taper, and on the news dropped to their lowest levels in almost two months, though they have upticked slightly in early Sept. 19 trading.

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