It continues to seem likely that QE2 will unfold against a backdrop of steadily rising treasury and investment grade bonds yields in the coming months. In a sense the second round of quantitative easing is just the monetary version of “cash for clunkers”, which effectively shifted car sales that would have occurred later in 2008 to the summer months. QE2 may lower yields in the short term but it is unclear that there will be any lasting effect.
The build-up to QE2 has also been characterized by a rapid sell-off in the US dollar, but this is merely a reflection of powerful investment flows rather than a genuine or deliberate debasement of the currency by the Federal Reserve Board. Nobody wants to own an investment that decreases in value. Ironically the US dollar has been notably more robust since the official launch of the QE policy and it is certainly possible that it has marked its lows for the time-being, particularly against major currencies.
The great winner in the QE2 sweepstakes thus far has been the commodity complex with money chasing virtually the entire spectrum. Agricultural commodities have been particularly strong with multi-decade highs recorded in sugar, coffee and spices. In terms of the commodities gold has managed to establish a series of new all time highs over the past few weeks and crude oil has finally managed to break above its multi-month range as it moves toward $90 per barrel.
We would not bet against any portion of the commodity complex at the moment, but are also not particularly tempted to jump aboard a runaway train either.
