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Bond Rates Might Be Predicting QE3   June 1st, 2011
This isn't a science, but there is precedent       


More observations...

With U.S. 10-year bonds falling below 3% for the first time since June 2010, this might be yet another warning that QE3 is coming soon.

While certainly not an exact science--nor does past performance guarantee future results--it's interesting that since the financial crisis exploded in 2008, 10-year interest rates have dropped below 3% on two occasions. In each case, the Federal Reserve began a money-printing/quantitative easing plan four months later.

Interest rates dropped below 3% on November 28th, 2008 and less than four months later--on March 18, 2009--the Federal Reserve began printing money with QE1. Interest rates quickly started increasing.

But, once again, rates fell below 3% on June 29th, 2010. Just about four months later--in November 2010--the Federal Reserve restarted printing money with QE2. Again, interest rates then began to increase.

Today interest rates have again fallen below 3%.

If the last two rounds of money printing have been any indication, this may presage QE3. If we use the four months figure that has worked the last two times, that would place QE3 at the end of September or beginning of October of this year. That would potentially coincide with my prediction last November when I predicted QE3 in late 2011 or early 2012.

I'm not suggesting there is a direct correlation between the 10-year bond rate dropping below 3% and the Federal Reserve printing money. Rather, it's more likely that they are both consequences of the same causes: Increasing pessimism and a slowing economy causes investors to leave the stock market in a "flight for safety" in U.S. bonds which drives rates down. At the same time, the increased pessimism and slowing economy eventually prods the Federal Reserve to believe that printing some more money will stimulate the economy.

Now, stubborn unemployment, , a stalling GDP, , a double-dip in the housing market, continued European debt problems, and the scheduled end of QE2 next month all have investors worried. And, eventually, the debt ceiling will worry investors (though this will actually work to increase interest rates).

Regardless of exactly when it happens, it would appear that the conditions for renewed money-printing by the Federal Reserve are ripe--whether they call it QE3 or something else.

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