This Is How Much QE Matters…

Right, so 10Y yields are all anyone wants to talk about.

In fact, you’ve probably heard so much about Treasury yields this week that you’re about to click out of this post right now (just admit it).

But wait. Because we’re not going to talk about what levels are “key” here. We’re not going to talk about “resistance” or “support” and we’re not going to do any tea leaf reading. They’ll be plenty of opportunities for that next week, we’re sure of it.

Besides, if what you want to do with your Saturday is read about how 10Y yields have responded to recent events, we already wrote that post earlier.

How about – and let’s just try this – instead of debating whether 2.31 is the level, or whether 2.25 is the level, or whether we can divine anything about the future from the euro-dollar strip, we look at exactly what it is that goes into “making” 10Y yields? That sounds fun, right? Not really. We know.

But bear with us and consider the following from Deutsche Bank because if you get nothing else from it, do note the bolded passages for what they say about the sheer scope and power of global central bank largesse.

Via Deutsche Bank

We employ a multiple regression to explain the level of 10yr Treasury yields. The three inputs into our model are the level of fed funds, Fed expectations (using the 2s-funds spread as proxy), and a capture-all Global QE Flow variable. The first two inputs allow us to “bootstrap” the 10yr yield and isolate it from the expected path of short-term interest rates. The third input attempts to capture the leftover portion of the 10yr yield, which we have pointed out in the past is closely related to the Fed’s ACM term premium. The right chart below shows the construction of our QE variable versus the 10yr term premium (inverted on the right scale).