Wednesday, June 22, 2011

Suppressed Yields?

In a recent post titled Suppressed Volatility, EconomPic posited:
It is simply (in my view) that volatility across ALL sectors and asset classes has been suppressed by the liquidity that has successfully (to date) been finding its way into riskier and riskier asset classes following the combination of unprecedented fiscal / monetary stimulus and a lack of "real" investments (i.e. investments that feed into economic growth and create jobs) for this liquidity to go.
Here is a visual depiction of that mechanism.

That's right. In the first quarter, the Fed purchased $1.4 trillion in Treasury securites or 190% of all net issuance for the quarter (a period in which households reduced Treasury holdings by more than $1 trillion). This $1 trillion went somewhere (think risk assets). Also would seem to explain why Treasuries snapped back sharply in the second quarter when disappointing economic news and a subsequent rebound in demand for Treasuries was met by a reduced net supply.

Source: Federal Reserve