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10-year treasuries and QE

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Prime Posted: Wed, Aug 22 2012 3:07 PM

Can anyone explain the relationship here? I get that when the Fed purchases 10-year notes, it drives the price of the notes higher, and therefor the interest rate drops. What I can't figure out is why the market, in anticipation of QE, has the same effect. Wouldn't private investors want to get out of the 10 year treasury market prior to QE, and this would lower the price of the bonds, and subsequently increase the interest yield? But it never works that way. Today they released last months FOMC minutes, which hinted at QE3, and sure enough 10-year note yields dropped like a rock. Why is this?

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Bogart replied on Wed, Aug 22 2012 3:37 PM

If you owned a 10 year treasury and suddenly the Fed announced that it wanted to buy a bunch of them, then you would want to wait for the Fed to start competing with other buyers for your treasuries.  Conversely if you wanted to buy the bonds then you would attempt to purchase them before you have to compete with the Fed.

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Prime replied on Wed, Aug 22 2012 4:04 PM

Ya, that makes sense. If you think of the 10-year T-note like a stock, the idea is to get in the market before the Fed does. I guess I was looking too much into it. It's getting old trying to invest around the remarks of one all powerful chairman.

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Eugene replied on Sat, Sep 15 2012 2:41 PM

I didn't understand the explanation. I would also expect the price of 10-year notes to increase, because we now have a new and determined buyer. Why did it decrease? It doesn't make sense.

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