"If the Fed bought three
quarters of the new issuance of Treasury securities over an 8-month period,
with a focus on longer maturities, the 10-yr Treasury yield would almost
certainly fall, right? And if the Fed bought all the new issuance of MBS over
an 8-month period, increasing its share of home mortgages by over 40% in the
process, yields on MBS would almost certainly fall, right?
Wrong. The Fed has indeed been a huge buyer of Treasuries and MBS since last September, but Treasury yields and MBS yields have moved significantly higher, not lower.
What we've witnessed over the past 8 months—the duration so far of the Fed's Quantitative Easing Part 3—is almost a laboratory experiment designed to discover which is the more important determinant of longer-term interest rates: the market's willingness to hold the existing stock of bonds, or the actions of a very large purchaser of bonds on the margin (i.e., the stock vs. flow argument)."
