Yields on treasury bonds were expected to start trending up as the end point for the Fed's $600 billion QE2 program came closer. The thinking was that as the Fed stopped buying these bonds, yields will have nowhere to go, but up. This fairly plausible view, which has Pimco's Bill Gross as one of its exponents, has failed to materialize thus far.
With QE2 just days away from coming to a close, yields on the benchmark 10-year treasury bond are below 2.9%. Yields on the shorter maturity treasury bills are close to zero. This would mean that investors in treasury bills are not asking for anything in return for lending money to Uncle Sam. Given the deadlocked debt-ceiling negotiations in DC and Greece's debt problems hogging headlines, is the bond market behaving rationally?
The short answer is - Yes. The bond market is rationally pricing what the Fed will do to its balance sheet and short term interest rates even as QE2...
