As if government bond yields weren’t low enough already, Deutsche Bank’s Peter Hooper estimates that a fresh round of quantitative easing from the Federal Reserve could drop the 10-year yield by a full 50 basis points (0.50%).
This means we could see sub-2% yields on the 10-year, which is an injection of stimulus for just about every asset price on earth.
Impact on Treasury yields
If we assume the Fed were to engage in a total of $1 trn of new QE, the total decline in 10-yr yields would be around 50 bps based on a rule of thumb of 5 bps per $100 bn (the range of course, could be between 20 and 70 bps decline in rates). As we have noted, some portion of this effect has already occurred as the market has been anticipating a move. This effect could be increased by ongoing private (and foreign official) demand for low- risk, fixed-income assets. It could also be increased if the Fed designs its program to include an implicit commitment to adjust its purchases to resist upward movements in rates that it felt were not justified by meaningful improvements in economic prospects. Such a Fed “put” would encourage private market investors to help in holding rates lower. In any case, we will assume, that the Fed’s second LSAP [Large Scale Asset Purchase] program succeeds in reducing 10-year yields by 50 bp relative to the path they would otherwise have followed and note that there are some upside risks to this estimate.
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