With a week since the launch of QE3, I wanted to study various credit instruments and see what the debt market is saying about the Fed’s latest attempt to stimulate the economy. The initial reaction when the policy change was announced was very aggressive with yields moving sharply higher. But over the past few days it has somewhat reversed.
Fundamentally, the move of the Fed was clearly inflationary and likely more so than QE1 or QE2 because it did not have a cap or expiration date. But at the same time, investors are likely seeking the safety of fixed income as equity prices push to levels deemed by many as lofty.
There is also the flow of capital out of Europe into the safety of the US which is likely skewing the picture. But by studying more than just Treasury yield, perhaps the picture is a bit clearer. Let me start by reiterating the risks that face debt investors for they are different than equity.