| Over the years, we can claim to have “called” many economic developments correctly, such as the secular decline of the USD and the “L-shape” of the recession and associated weak recovery. We have, however, made one major error in that we expected the end of quantitative easing to lead to yield curve steepening. The logic seemed irrefutable: the US government would have to compete for its borrowing with the private sector, and accordingly, would have to pay higher longer-term rates. This has not happened, although a kind of “shadow” has occurred in bank lending, in that banks are opting to lend to the Fed rather than to businesses or homeowners. |
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| While the political leaders in the USA and the euro zone are dithering, the Fed, at least, is committed not only to indefinitely low short-term interest rates, but also to low long-term rates. Quantitative easing has already achieved this, and it seems that, even if no new funds are committed by the Fed to buying Treasuries, the average maturity of its T-Bond holdings will be lengthened, i.e. the Fed will flatten further the yield curve. |