The real motive behind QE2

8 Dec

On 3rd November, the US announced Quantitative Easing Part 2. This entailed an asset purchase program of USD 600 bn. The official rational – to lower the cost of long term borrowing. The rational according to me – to pursue a covert policy of dollar devaluation.

The rabbit is out of the hat now. The past few days has seen a rapid increase in the US 10 year bond yields. From 2.9 per cent on 6 Dec, the yields have hardened to 3.22 per cent today. A jump of close to 10 per cent. If anybody had any misgivings about long term interest rates falling post QE2, I hope they are laid to rest.

With Obama agreeing to the extension of tax cuts, markets have factored in a higher federal deficit next year, leading to a sharp rise in yields. Whatever impact QE2 might have had on the long term yields, this one single move has turned the table upside down.

What to watch out for going forward? The value of the dollar. If I was to hazard a guess, the dollar should weaken going forward – fits neatly with Obama’s plan to try and double US exports in the next five years.

One Response to “The real motive behind QE2”


  1. What the bond yield tells us… « Informed Investors - March 13, 2011

    […] you read my previous post ‘The real motive behind QE2‘, I had mentioned  that an asset purchase policy should lead to a fall in yields as the […]

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