Is The Yield Bottom Already In For Bonds?

What a QE3 Could Do to Bonds

Don't use history as your guide on how the next round of quantitative easing from the Federal Reserve will affect your Treasury portfolio.

As expectations grew before the first round of quantitative easing in 2008, known as QE1, and then the second in the fall of 2010, demand for Treasuries rose and their yields fell—as you'd expect from programs that included direct purchase of U.S. government securities. But once the purchases began, prices fell (and yields rose) as investors steered the Fed's newly unleashed liquidity into riskier assets and sold down their holdings in safe-haven Treasuries.

The 10-year yield rose 1.46 percentage points between the start and end of QE1. It rose 0.38 through QE2.
But now that Fed Chairman Ben Bernanke's remarks and a weak August jobs report have raised the likelihood of QE3—a move that could come as early as the central bank's Sept. 12-13 policy meeting—investors aren't so sure that a subsequent selloff will be forthcoming.

That's partly because doubts about the effectiveness of more monetary stimulus are seen limiting the kind of cheer that spread through riskier markets in the earlier rounds. This, in turn, could limit the damage done to Treasuries and bolster their role as a sustained haven in times of economic stress.

Rates strategists at Bank of America Merrill Lynch wrote recently they suspect QE3 will not be as bearish for bonds as the first two rounds because of the "perceived ineffectiveness of monetary policy."

My view:

One idea the article does not discuss is the upward movement of gold.

Gold is a safe haven asset, and the purest form of money.

The attraction of bonds has diminished as yields remain extremely low as governments attempt to push short term yields into negative territory.

Since gold has zero yield, when government bond yield reach nil, gold's attractiveness blossoms.

What will happen to gold as central bankers debauch their currencies further?

The leap upward could be quite spectacular.

My $1850 year end gold target may be too conservative.