Loading ...The QE naysayers at that time focused on the risk of inflation – and even hyperinflation – in consumer prices. However, the paramount issue was instead market distortions and hyperinflation in securities (and asset) prices, where perpetual QE essentially removes any ceiling on sovereign debt prices (floor on yields). Why shouldn’t exuberant traders imagine Treasury yields at some point trading at the current Swiss bond yield of negative 52 bps?
Why not leverage Treasuries (i.e. 10-yr at 2.06%) if the Fed will eventually become a price insensitive buyer of Trillions of these securities? Why not take levered positions in German bunds at negative 29 bps – better yet, Italian and Greek debt at 2.15% and 2.52% – appreciating it’s only a matter of (probably not much) time before the ECB fires back up the “electronic printing press.” Perhaps most consequential of all, why wouldn’t everyone speculating globally in the risk markets simultaneously leverage in sovereign debt, confident that aggressive global QE deployment devises the perfect market hedge? Why not hedge market risk with sovereign debt-related derivatives? In total, we have unearthed a recipe for history’s greatest episode of speculative leveraging (mortgage finance Bubble excess measly in comparison).