PIMCO’s bond king Bill Gross , raised a few hackles earlier this month, when he asked rather dramatically, “Who will buy treasuries when the Fed doesn’t?” Cue up the ominous music. The Fed, Gross explains, now buys 70 percent of all new Treasury debt as part of its easy money program; foreigners buy the rest.
Gross doesn’t want to completely rattle us. Someone will buy Treasury debt, he tells us, maybe even PIMCO, the world’s biggest bond fund. But at what yields? By Gross’s reckoning, they are at least 1.5 percentage points too low.
There are some heavy hitters out there who beg to differ. When QE2, as the Fed’s second round of quantitative easing is known, slips out the door, it won’t be the bond market that suffers.
“What happens if there is no QE3?” asks David Rosenberg, chief economist of Gluskin Sheff in his daily note to investors. “The answer is hardly complicated since we have a template for this in 2010. It is a very simple guidepost.” We were QE-free for four months in 2010, from late April through August, he reminds us. And it wasn’t pretty—at least not at least for stocks and commodities. The S&P 500 spiraled down 12.5 percent. Oil dropped from $84.30 to $75.20. Volatility increased.
But what happened to good old govvies? Prices surged: “The yield on the 10-year U.S. Treasury note plunged to 2.66 percent from 3.84 percent,” says Rosenberg.
How could that be? The goal of QE is to whet investor appetite for risk, Rosenberg observed. Fed chief Ben Bernanke has said so himself. No QE, no risk. So treasuries prosper.
BlackRock chief Larry Fink isn’t shedding any crocodile tears over the departure of QE2, either. In an interview with Bloomberg TV, he explains: “You cannot look at just the Treasury market alone. If you encompass all the cash sitting on the side and you look at how much debt reduction we have seen in the credit markets, I believe there will be a ceiling of how high rates can go.” If 10-year notes, currently hovering around 3.5 percent, go to 4.40 percent, Fink would be a buyer. Only a spike in inflation would alter his view on that.
But Gross frets about the ability of the private sector to stand on its own two feet once QE2 is gone. He likens it, most unfortunately, to D-Day, “a day fraught with hope for victory, but fueled with immediate uncertainty.” Pah-lease. This is the bond market. And if he’s really worried about individual investors (reminder: Those are Gross’s clients, and they aren’t quite so interested in buying bonds anymore. ) shouldn’t he have more pity on all those savers who have been essentially taxed over the past three years with super-low rates while we were re-building the financial system?
For his part, Warren Buffett is ready to place his full faith in the private sector—and bid a fond farewell to all manner of stimulus. In an interview yesterday with CNBC he says: “I think the main thing that makes the economy come back is 300 and some million people trying to figure out how to live better tomorrow than they're living today.”
QE2, adieu.
Related links:
Yes, Mr. Bernanke, inflation does matter (Bloomberg)
End of QE2 Marks D-Day for the Markets: Bill Gross (Seeking Alpha)
Here’s What Quantitative Easing Did to the Hong Kong Property Market (Business Insider)