Recap 9-21-12: QE, Rates, Inflation, and Silver


One of the effects of QE3 is that many MBS holders, who hedged their duration by paying fixed in swaps, have been selling both their MBS holdings as well as unwinding their hedges. As a result, as current coupon rates (white) have dropped, so have swap spreads. (The spread between swap rates and treasury rates, orange)

By compressing swap spreads, the receiving in swaps space has in turn driven buying in treasuries. As a result, post FOMC, nominal yields (white) have fallen, while real yields (orange) have been stable. So by implication, implied inflation break even rates (nominal – real rates) have fallen:

Clearly, these flows are distorting the picture a bit. It remains to be seen where inflation break evens would be without these flows, but the answer to that is likely to be a key factor for the precious metals group. Because without sustainably higher inflation expectations, (white) it not clear how much higher Silver (orange) can go, given that speculative positioning as well as producer hedges are at local highs.


  • US mortgage rates hit a new record low. 30y fixed rates are just 3.49%.
  • The FT, based on comments from officials, reports that the EU authorities are working behind the scenes with the Spanish government to pave the way for a precautionary programme. The government said it would announce a new reform package on 28 September, including more structural reforms. After this, the government could potentially make an official request and accept conditionality in line with these announcements, which would allow it to save face.
  • The Journal talked about how Eurozone governments are pushing less stringently for strict austerity packages and are willing to give countries more breathing room. There is more appreciation of the view that steep austerity may be exacerbating the downturn across Europe.

Upcoming Data:

  • Mon: German IFO, Dallas Fed
  • Tues: Canada Retail Sales, Richmond Fed
  • Wed: German CPI, South Korea PMI
  • Thu: EU Money Supply, Industrial Confidence, US DGO, Jobless Claims, Japan PMI