With the Fed meeting coming up this week and the domestic economy showing signs of slowing, the inevitable QE3 talk is once again front and center.
The Fed’s latest QE activity, Operation Twist, will be completed at the end of June. During Operation Twist the Fed absorbed all the issuance of Treasury securities beyond seven years so investors will be waiting to see the impact of the end of this operation and whether global investors are up to taking on the incremental supply.
Moreover, with the U.S. economy slowing, Europe in a recession and China showing signs of strain, the clamoring for “helicopter Ben” to initiate a new round of QE will be intense. But with employment generally improving and inflation expectations higher than they were when the Fed initiated other QE programs, look for the Fed to come out with a non-committal statement that will buy them time to evaluate the economic recovery until their next meeting in June. As a result, Treasury yields will stay within a range and be defined more by macro risk events overseas than domestic economic data.