PREDICTION: After QEII Ends, Interest Rates Will Fall, Not Rise

Since it’s early, and it’s quiet, we figured we would make a prediction.

Yesterday, Bill Gross asked: Who will buy Treasuries when the Fed stops?

The implication is that maybe nobody will show up to the auction, and interest rates will surge. Here’s a good rebuttal to the idea that nobody will show up.

But we’ll make a prediction.  A month after QEII ends, interest rates on the 10-year will be lower, not higher than they were on June 30, 2011 .

The reason is that a key reason rates have gone up is the huge gain in risk assets (like stocks) and thus the need for Treasury yields to catch up. If QEII ends, and the asset inflation tapers off, then yields can fall as they always do.

As a reminder, here’s a 10-year look at the S&P 500 vs. the 10-year rate.