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Wednesday, November 17, 2010

The Impact of QEII

On September 21st, the FOMC signalled a new round of quantitative easing with the following:

The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.
An interesting theory from James Bianco (via The Big Picture) as to why we perhaps shouldn't be surprised that the positive impact of QEII has been outside the Treasury bond market (even though they are targeting $600-$900 billion in Treasury purchases).

Over the last several weeks we have repeatedly mentioned the Federal Reserve’s portfolio balance theory. In a nutshell, this theory states it does not matter what securities the Federal Reserve buys with newly printed money (QE2). The market will arbitrage this new money into the market that it thinks will have the most impact.
With that theory in mind, lets take a look at one relationship that seems to have diverged since the announcment of QEII... the rather strong relationship (outlined here) between gold and Treasuries.

Source: Yahoo