Felix Salmon

Is QE2 already working?

By Felix Salmon
November 15, 2010

Bloomberg’s Liz McCormick has an interesting take on QE: “Options Showing Quantitative Easing Working Before It Begins” is the headline on her piece, which concentrates on an obscure indicator known as “payer skew.”

Payer skew is an indicator which goes up when bond yields are rising, and goes down when they’re falling. When payer skew is high, as it is now, it’s an indication that markets see more risk that bond yields are going to continue to rise than they see risk that yields will fall.

But it’s a stretch, I think, to conclude that the rise in payer skew means that QE is working. And it certainly can’t be working before it even begins. After all, QE2 has already begun, with the purchase on Friday of more than $6 billion in bonds maturing between 2014 and 2016.

It seems to me that what we’re seeing in the payer skew numbers is the downside of QE, rather than its intended consequence. The stated aim of QE, after all, is to bring down long-term interest rates, and that isn’t happening at all:

Yields on 10-year Treasuries, a benchmark for everything from corporate bonds to mortgage rates rose last week by the most since December, surging 26 basis points, or 0.26 percentage point, to 2.79 percent.

Meanwhile, the problem with QE is that it maximizes the amount of volatility, uncertainty, and tail risk in the markets generally and the bond market in particular. Since businesses invest when they have certainty about the future business environment, QE risks exacerbating the very problem that it’s intended to solve.

My take, then, on the payer skew figures is that they’re an indicator of increased risk and nervousness in the bond markets. While traders don’t yet expect higher inflation outright, the demand for hedge against falling bond prices is definitely rising. There’s nothing here to encourage businesses to take out long-term loans and invest the proceeds in new permanent jobs.

So I can’t imagine that anybody on the FOMC is looking at the rising payer skew numbers as an indicator that QE is working. After all, the ultimate aim of QE is to create jobs. And I can’t think of a single reason why higher payer skew means more job creation.

4 comments so far | RSS Comments RSS

“The stated aim of QE, after all, is to bring down long-term interest rates”?

Really? I thought the goal was to jump-start the economy. Given that interest rates (including long term ones, like 30 year mortgages) are already pretty low by any measure (how much lower than almost free for banks can money be?), how is this going to move the economy at all?

The only hope for QE to work is if those with cash hoards believe it will help the economy and they start deploying the cash. And that definitiely hasn’t started yet.

Posted by OnTheTimes | Report as abusive

What marks the beginning of QE: when the Fed first buys bonds under the program, or when the Fed first makes a credible commitment to do so?

Posted by Sandrew | Report as abusive

Back when I took Econ 101 they called it “Printing Money”. Whatever you call it, the main result will be devaluation of the dollar. That seems like the only option the US has at this point.

It might help slow the hemorrhaging of jobs to Asia. It will certainly increase the cost of imported oil (which some will see as a helpful side effect).

Posted by Tom_in_PA_USA | Report as abusive

Isn’t the goal of QE to jump-start the economy by bringing down long-term *real* rates? And isn’t the expectation that it will do so by increasing inflation? After all, when there is deflation with low nominal rates, that is a high real rate.

And as payer skew is about nominal rates, this seems to be working as intended, if it is a strong signal at all.

Posted by jmalicki | Report as abusive

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