QE3: Already a Crowded Trade?
By Walter Kurtz, Sober Look
Leveraged investors such as hedge funds are piling into longer term treasuries and other rate product in anticipation of QE3. The speculative long positions are near records.
Source: JPMorgan
But the Fed may choose to avoid outright QE3 this year for the following reasons:
1. A spike in commodity prices that is now taking place could be exacerbated by outright asset purchases (as happened in early 2011). Higher commodity prices will make additional QE counterproductive.
2. Increases in US residential rents and rising commodity prices are yet to flow through to the CPI. The Fed will be cautions about stoking inflationary pressures.
3. Bank credit in the US is actually expanding, which was not the case prior to QE2, when the environment looked deflationary.
4. The Fed has other tools it will want to exhaust before commencing outright purchases. The Fed will save outright purchases as the last bullet in case of an extreme event such as the Eurozone losing one of its member states in a disorderly manner.
That means that these leveraged investors could find themselves on the wrong side of a crowded trade if the Fed sticks to some form of Maturity Extension Program rather than outright QE. And the unwind of this trade could end up being quite violent, pushing treasury yields considerably higher.
8 Comments
When/If leveraged players are going long longer term T-bonds then that’s a sign the 31 year T-bond bull market is coming/has come to an end.
But for QE3 to work the speculators need, at least, one asset class going up.
There’s no way QE3 is coming now that food prices are skyrocketing.
BIG election coming. Do you really think the Fed will do nothing if the markets/economy are struggling? Bernanke and Co. will dig as deep as they need to.
Why
The Fed has a long history of lending its support at election time. Elected officials are essentially Ben’s boss. Happens almost every time. Also, the fed wants to avoid any suspicion of partisanship that could arise from economic turmoil. It has a practical side too that cool heads vote smarter, you don’t want to hold an election during an uproar. I don’t expect QE soon- my guess is September and if things go well QE may not be necessary. Probably wouldn’t be effective anyway outside of a trading opportunity. But that’s another story.
Been thinking something similar. This may be Peak Macro as TLT becomes the new QQQ.
If QE3 is not implemented shortly, this buy the “dip” bullish sentiment should dissipate relatively quickly.