The Federal Reserve announced its plans to drive quantitative easing (QE) part 2 by maintaining the reinvestment of “…principal payments from its securities holdings purchasing…[and purchasing] a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month.” The New York Fed followed by explaining that the execution of these purchases will result in an average duration of between 5 and 6 years for these securities with the following approximate weighting:
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*The on-the-run 7-year note will be considered part of the 5½- to 7-year sector, and the on-the-run 10-year note will be considered part of the 7- to 10-year sector.
**TIPS weights are based on unadjusted par amounts.
The purchases of longer-term securities must have been significantly below market expectations because yields soared (prices dropped) on longer-dated Treasury bills. Notably, TBT, the ProShares UltraShort 20+ Year Treasury, soared on record one-day volume and recovered its losses from the past few days. The 35.2M shares traded over tripled the average volume of 10.9M shares. TBT even launched a picture-perfect bounce off its 50-day moving average (DMA). The case for a bottom in TBT seems even stronger than when I connected the improving technicals with Bill Gross’s re-declaration of a top in the bond market:
(Click for a larger view)
Since the Federal Reserve is in the business of distorting the market, I cannot cling to certainty about a bottom. However, the odds seem pretty good. Time should soon tell as the Federal Reserve begins its purchasing program…even as the recent election raises the prospect of the Federal government soon reducing its issuance of these securities.
Be careful out there!
Full disclosure: long TBT