Is QE2 already working?
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.