March 30, 2012
I recently read an article that pointed out that in 2011 the Federal Reserve purchased 61% of U.S. Treasury bond issuance. In the markets there is a lot of speculation about another round of quantitative easing (which is sometimes called QE3). Such speculation has kept the equity markets afloat, rising and retreating on QE3's prospects. However, with such massive purchases it seems that the Fed never actually backed off their last quantitative easing scheme. Meanwhile, non-Fed buyers of our bonds (foreign purchasers, banks, mutual funds, etc.) are buying at much lower levels than at any point since the "Great Recession". And that's not because borrowing is down.
I wonder if the Fed is creating a bubble in government debt. Or, assuming the bubble has been created, if the Fed may be trapped into buying all these bonds. An affirmative answer to either one of those questions could make the 2008 crisis look like child's play.
Brennan R. Redmond, CFA Vice President
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