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The Unintended Consequence of Open-Ended QE

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A look at the rising risk of actual volatility.

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So you have a market that is short volatility facing a potentially very volatile environment. There is the nature of the volatility in the incoming data and how the market calibrates the discount of the ultimate size of the QE program. You have the changing inflation implications in the data's effect on the size of QE and that impact on the yield curve. Then there is the reflexive relationship of the negatively convex MBS market and the added inherently volatile low coupon long duration assets. Taking all of these ingredients together and Bernanke is cooking up a witches' brew of market volatility.

With current coupon MBS yields currently trading on top of 10YR yields you have to believe there is a considerable amount of purchasing already priced into market prices. However I believe that how much this discount changes with incoming data trends will be the source of an increase in volatility risk in the bond market which could translate into increased volatility risk in all markets.

Twitter: @exantefactor
No positions in stocks mentioned.
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