QE Stumbles at the Starting Blocks

Global interest rates are rising, which is not what Bernanke had in mind with QE. The US 30-year auction went poorly yesterday, reflecting a change in psychology of the Treasury markets the opposite of what QE is supposed to engender: according to this morning’s WSJ, fear of inflation is trumping the Fed’s buying power, and rates are rising.

Bond buyers have bought ever-lower yields expecting they could bail out if rates began a persistent rise. The spread between the 30-year and the 10-yr has increased in one of those parabolic curves which tend to end badly:

PragCap observes that this means bond buyers are eschewing the long bond so as not to be locked into rates close to the 10-yr, which means the market is expecting rates to rise and the 30 Year Bond Bull to end. Since the QE pre-announcement at the end of August, the long bond has gone from below 3.6% to above 4.2%, a huge move. Can owners of large positions get out fast enough? This is PIMCO’s nightmare come to life.

The Dollar continues to firm while the Euro seems in trouble. The sovereign debt problems of the PIIGS have returned. The Euro is close to $1.365, a level which could trigger a dump of the Euro. The AUD remains above parity after ticking below $1 yesterday, and it too might get a sell-off if it breaks 99.5c.

To follow this more closely, note that EWI is offering their forex services for free this week. Click here if interested.

Even stocks are not reacting as Ben expected. Recall that his stated reason for QE2 is to drive stocks up, creating a wealth effect that restores confidence to the economy and spurs more business activity. It is not just that stocks have flatlined since the QE announcement, but insider selling is way up:

  • MIsh congratulated Cisco (CSCO) insiders for getting out ahead of the earnings debacle last night, which sent shares initially down 15%: over the past six months, the Cisco scorecard is 6.6M shares sold, 0 share bought
  • ZH reports that insider selling hit an all-time record last week:

Contrarian footnote: while insiders are selling and global markets are reversing, bullish sentiment soars! Small investor bullishness is back to 2007 levels! This is what happens around a top.

About Duncan Davidson 228 Articles

Affiliation: NetService Ventures

Duncan is an advisor to NetService Ventures, where he focuses on digital media and the mobile Internet.

Previously he was at four start-ups: Xumii, a mobile social service based on a Social Addressbook; SkyPilot Networks, the performance leader of wireless mesh systems for last-mile access, where he was the founding CEO; Covad Communications (Amex: DVW, $9B market cap at the peak), the leading independent DSL access provider, where he was the founding Chairman; InterTrust Technologies ($9B market cap at the peak), the pioneer in digital rights management technologies, now owned by Sony and Philips, where he was SVP Business Development and the pitchman for the IPO.

Before these ventures, Duncan was a partner at Cambridge Venture Partners, an early-stage venture firm, and managing partner of Gemini McKenna, a joint venture between Regis McKenna's marketing firm and Gemini Consulting, the global management consulting arm of Cap Gemini.

He serves on the board or is an adviser to Aggregate Knowledge (content discovery), Livescribe (digital pen), AllVoices (citizen journalism), Xumii (mobile social addressbook), Verismo (Internet settop box), and Widevine (DRM for IPTV).

Visit: Duncan Davidson's Blogs

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