NEW YORK (TheStreet) -- There were rumblings in July and August that the Federal Reserve would try to jump start the U.S. economy. By September, the notion that the Fed would embark on a second round of "quantitative easing" became a foregone conclusion. By October, the main questions were, "How much treasury debt will you buy?" and" "How long's it going to take?"
Some wondered whether the Fed would be purchasing short, medium or long-term treasury debt, but that wasn't difficult to surmise. In "Long Treasury Bonds Will Not Be On The Fed's Buy List," I explained that the Fed would purchase treasury bonds in the 5-10 year range. This is because mortgage rates are tied to the 10-year note and big-ticket consumer purchases (like automobiles) typically last for a duration of 4-5 years.
Flash forward to yesterday's FOMC meeting. Over the next eight months, the Fed intends to purchase $600 billion in treasury debt with an average duration of 6 years.
So the Street received exactly what it had anticipated. And yet... here's the amazing part. Investors who recently piled into longer-term treasury bond debt were actually surprised by their bonds getting crushed.
A few days earlier, I talked about the possibility of using TBT in a near-term trade to capitalize on the Fed's intervention. Quite a few comments at ETF Expert and other web sites expressed dissent.My intent to show this "trade," rather than a long-term investment, was based on the realities of QE2; it was an educated "call" that the Fed wouldn't touch the long end of the treasury curve; it was a "recognition" that there'd be just enough economic growth and just enough employment stability for long-term bond yields to climb through the end of 2010. Based on some of the comments, you'd have thought my sentiment bordered on blasphemy. Nevertheless, the 30-year climbed nearly 20 basis points from 3.86% to 4.06% after the Fed's QE2 announcement.
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