QEII Update: How Did the Fed's Purchases Affect Yields This Week?

That's a bit of a loaded question.  Naturally, many billions of extra dollars flowing into the bond market are going to cause movements, and we'll see the extent of those in the charts that follow.  But it's important to keep in mind that QE2  already exerted an effect on the market at the time of it's mere ANNOUNCEMENT and disclosure of anticipated amounts.  In fact, this notion of the Fed's buying already being priced in to this week's market before the actual purchases themselves is one of the reasons that sane people are relying on to maintain their sanity.  Otherwise, life wouldn't make much sense.

What follows is a snapshot of the dollar amount of securities purchased, and the maturity range affected, as well as a brief overview of the operation and a weekly chart of the most relevant maturity treasury note/bond. (in order of duration from shortest to longest as opposed to chronological order) Enjoy!

$5.4 Billion in 2-3yr range on Tuesday 11/16

$7.2 Billion in 3-5yr range on Thursday 11/18

$7.9 billion in the 7yr range on Monday 11/15

$8.1 billion in the 10yr note range on Wednesday 11/17

$2.17 billion in the 30yr range on Friday 11/19

Note that the day with the smallest dollar amount of Fed participation is also the day with the smallest movement across all maturities. 

If you feel like you missed out on a week of good times by not watching these open market operations unfold, fear not!  Next week has plenty of Treasury buying and auctioning action to whet your insatiable appetite for fixed income!  Not only are there ongoing Fed purchases, but auctions in 2's 5's and 7's, and all squeezed in on Thanksgiving week!

Here's the schedule:

QEII Open Market Fed Purchase Operations Next Week...

US Treasury Auctions Next Week...

The bond market is closed next Thursday and investor attention will be generally distracted by holiday events throughout the week. Combine that illiquid environment with $99 billion in coupon supply ($35bn 2s, $35bn 5s, and $29bn 7s) plus bearish technical considerations (QEII cleansing process not complete) and the resulting effect increases the potential for choppy price action. Thus, we not rule out the possibility for higher rates heading into December.  However, once the pain trade is washed out, we view the market as primed and ready for another attempt at an interest rate recovery rally.