1st July 2011
Not long after the Greek government won the second stage of its austerity package vote the US Federal Reserve undertook its last asset purchases of US government bonds under what has become called QE2. As it has purchased a total of US 600 billion dollars in eight months this means that it has bought an average of 75 billion dollars a month. Put another way since this programme started the US central bank has purchased around 70% of the debt its government has issued.
This is not a complete end to Federal Reserve purchases of US government bonds however as it has another programme which purchases them with funds received from maturing mortgage backed securities that it has in its portfolio. However this is a much smaller programme which purchases between 15 and 25 billion dollars per month depending on how many MBSs actually mature. As you can see the scale of purchases going forwards will be much reduced.
What did the US government bond market do in response to this?
I wrote yesterday that US government bond yields had risen strongly this week with the ten-year maturity whose yield closed below 2.9% on Friday rising to 3.11% at Wednesday's close. This rallying of yields continued as the ten-year yield closed at 3.16% meaning that this week alone we have seen more than a quarter point rise in the yield on these bonds.
So there has been no sign of a post Greek agreement rally here as the rise in yields means a fall in prices. I am also reminded of the press conference given by Ben Bernanke the chairman of the US Federal Reserve announcing the end of QE2 when he stated that pre-announcing its end would mean that by the time it happens markets will just shrug it off. We are very rarely able to look at one event in isolation but it does appear that the end of QE2 has led to a rise in US government bond yields and perhaps more worryingly for the programme they are now higher than when it started. So as reducing them was an objective of the plan it did not succeed in achieving this as instead ten-year yields have risen by more than 0.6%.
The US unemployment situation
In my opinion the primary objective for the US Federal Reserve with its QE2 programme was to improve the US unemployment and employment situation. I have given quotes from their statements and speeches many times to evidence this. As QE2 progressed it looked like some success was being achieved in this area as unemployment fell and the employment situation improved. However recently this improving trend has turned downwards and if we look at yesterday's figures for US initial jobless claims we can see the latest numbers.
"In the week ending June 25, the advance figure for seasonally adjusted initial claims was 428,000, a decrease of 1,000 from the previous week's unrevised figure of 429,000. The 4-week moving average was 426,750, an increase of 500 from the previous week's unrevised average of 426,250."
If we combine this with the previous numbers in this series we see that the headline weekly figure has been over 400,000 for twelve weeks in a row now. Also the four-week average has nudged higher and is well over 400,000. So the improving trend of the early part of 2011 has ended and we are back to similar figures to those we saw in January. I expect these numbers to influence the employment report for June because we have had only one poor monthly report so far but twelve poor weekly initial claims figures.
Accordingly QE2 has ended on a sour note if we look at the trend for unemployment. Yes the level of unemployment has fallen since it began so there has been some progress but the current level of initial claims implies that it might now continue the rise we saw in May which reversed some of the improvement. The real issue with this is that we were supposed to be solidly in an economic recovery by now and instead we have more questions and more problems.
To receive our free weekly email sign up here.