With QE 2 ending next month, and turmoil in the Eurozone, should we see appreciation in the dollar? I think that capital will seek out USD assets due to the problems in the Euro, and fuel upwards demand for the dollar. If this case plays out, what are the effects? Apart from corrections in commodity and equity markets, any ideas?
stocks go down. gas cheaper. we import more stuff and have to borrow more to finance it. not bad really as long as we keep expanding our economy. argument can be made that there is a flight into safe assets which is why USD is strengthening, QE2 ending should have the opposite affect (rates should go up). then again higher rates will attract more USD investors seeking higher yields so that goes the other way.
The rising rates should hurt current holders of debt, however once they do rise, they will have the double attraction of a rising currency, and higher yields. I suppose it depends on what timeframe you are looking at.
Yeah, higher real yields will be good for USD, which will in turn make imports a bit less expensive. That may turn out to be good on a number of levels for economic growth both here and abroad. But gas will still be high in absolute levels, and those who currently hold long-term Treasury debt will be hurt as rates rise.
Well rates are not rising and people have been saying that they will rise for years and lost a lot of money saying so. Someone on here said that it is not the level of interest rates that matter, but the expectations that matter. They said something like if rates rise it is okay as long as it is expected. Can someone clarify if I remember this correct?
Well rates and expectations of rates have to rise, because simply demand will drop after QE ends. Whether they will rise substantially may depend on if a lot of investors want to continue buying USD assets like treasuries.
Starbuk, I think the issue is that if you are buying bonds, you already have to have some expectations about how much of the return is going to be real vs. nominal-only. If you don’t think it’s enough real return for the risk, you don’t buy, and if you think it’s enough, you do. Everyone has their own take on what might happen to rates, but the market yield can be thought of as a kind of weighted average of those expectations for all market participants (though what throws a wrinkle in there, is that it’s really the expectations of the marginal buyer that determine everything, and not every buyer). If you’ve bought a bond, and everything works out the way you expected in terms of real and inflation returns, then you are happy with your return and shouldn’t be too upset. Therefore, it’s only when things DON’T work out as planned that things might go extra well or extra bad. So if rates are going up because QE2 is ending, that’s expected, and may already be incorporated into current yields. Theory says that if markets are efficient, then there shouldn’t be any extra value in selling bonds because of QE2 ending, because bond-buyers have already incorporated a change into their expectations. The problem, of course, is that different investors will come to the conclusion at different times. Large investors may not be able to dump large quantities all at once, and maybe it’s only certain parts of the yield curve that are going to be affected, and there may also be plenty of hedging and rebalancing of other things that affect the desirability of treasuries. So it’s pretty complex, and if you have some analytical skill at sorting out these kinds of issues, you may be able to adjust your portfolio to take advantage of it… probably that will be by adjusting position sizes rather than making pure buy/sell decisions. It also is not fully guaranteed that QE2 will end and be replaced with nothing. Remember that when things are expected with some given probability, and the event resolves to one outcome or another, there is still a snap-back effect where the people who were on the wrong side of the issue have to dump that position, and that will create a movement one direction or another. If you think markets are efficient, then theory says that the probability of either outcome is such that it is not a positive expectation bet to try to make money off of these “resolution” movements, but people still try. And if you think markets aren’t fully efficient, maybe it makes sense to try.
QE3 will begin next month. The only problem is we won’t know about it publically. I can’t see the Fed letting this one loose this soon in the game. Bernanke wants a weak dollar last time I checked.
Burji Wrote: ------------------------------------------------------- > QE3 will begin next month. The only problem is we > won’t know about it publically. > > I can’t see the Fed letting this one loose this > soon in the game. Bernanke wants a weak dollar > last time I checked. I hope it does and I hope it drops the dollar more. In fact, I’d go for another $2TR in QE no problem. The direct affect of QE1+2 is what’s going on in China right now. Hope he gives them another round of their own poison.