Race to the Bottom

Reuters details:

U.S. Treasuries rose broadly and the five-year yield hit a record low on Wednesday, supported by prospects of further monetary easing by the U.S. Federal Reserve.

* The five-year Treasuries yield fell to a record low of 1.179 percent at one point.

* Treasuries have been supported by market expectations that the Fed could unveil a second round of quantitative easing as early as November and make new purchases of Treasuries.

* An additional factor supporting Treasuries was a rally in Japanese government bonds in the wake of the Bank of Japan's decision on Tuesday to ease monetary policy, said a trader for a European brokerage house.

Sean from Dead Cats Bouncing details the why:

The purpose of QE is to increase inflation expectations and support growth, so success would be reflected in the long-run real rate (a proxy for real trend GDP growth) to mean-revert back towards the 2-2.5% range as happened in 2009.

The inflation expectations component of yields will have to move higher if central banks start chucking hundreds of billions of new money around. In other words, even with the Fed as bond ‘buyer of last resort’, nominal yields are unsustainably low, particularly as commodity markets are on fire in anticipation.

What is remarkable is that the Fed is going nuclear when the US economy is by no means in freefall (as evidenced by yesterday’s ISM non-manufacturing survey).

He finishes with a sentence that sums this all up perfectly.

We’re heading into uncharted waters and we’re traveling at full speed.

Source: Federal Reserve