The Trouble with Beliefs

We were discussing the concept of QE and 10 year yields today with clients and the media. The take away I got was that many "beliefs" are brought to the table before the conversation gets going. The consensus has embraced the idea that LSAP has significantly distorted term structure. The Fed has mopped up virtually all marginal Treasury supply. Amazingly, this view is held by many of the same voices saying, "Fed policy has not done anything." Except, by their own admission, lower long term yields.
Our view is different. 10 year yields are just 1 year forwards projected into the distance and 12bp doesn't add up to much. Flow of funds out of stock funds and into bonds has been massive and nearly 1 to 1. Demographics and asset/liability management also support the note. As free marketers, we have to quantify the variable effects. My "beliefs" would get me steamrolled many times over. We see the overall interest rate effect as small, roughly 50 to 60 basis points on the 10 year. What scares us is the well held beliefs of the others.
A turn in the market could be met with an incredible change in sentiment and positions. The ability to ease slightly away from the manipulation could be evaporating. If the Fed shares this fear, their open promises seem less silly. Meanwhile, the haters can rant that "if not for all the buying (by virtually everything and everyone) rates would be higher!" Ya, I guess so, but I trade the market where they do. Economics may not, after all, be about what happens at the margin, all black and white now, no more shades of grey. That's the trouble with beliefs.

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