The end of the Federal Reserve’s latest quantitative easing program (QE2) will send the bond market reeling, says Richard Lehmann, president of Income Securities Advisor, a financial advisory and research firm.
He tells Forbes magazine publisher Steve Forbes that the 30-year Treasury bond yield may surge to 6 to 8 percent next year from about 4.39 percent currently.
“Last November, Bernanke, in effect, said that inflation is coming,” Lehmann says.
“And without saying that they should be getting out of the carry trade, he was in effect saying, ‘We’re gonna make $600 billion available to the economy for buying treasuries,’ which was a way of saying, ‘We’re going to deflate this carry trade bubble, so don’t everybody rush to the door here at the same time.’”
That policy has worked, but now that the Fed has stepped away, get ready for an avalanche, Lehmann says.
“We can expect that those long (Treasury) rates, which right now are being managed by the Fed, will seek market levels. And that’s going to be higher,” he says, with the 30-year yield possibly even surpassing 6 percent this year.
Other experts also see the end of QE2 leading to higher Treasury yields.
“The completion of the Fed’s quantitative-easing program increases the available supply of Treasury debt to the market, which may add additional pressure for rates to rise,” Bank of America Merrill Lynch strategists wrote in a report obtained by Bloomberg.
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