After the Friday release of the monthly employment report by the Labor Department which showed 175, 000 new jobs created last month, the 10-year Treasury note is yielding 2.07%.
As it turned out, the number of new jobs was slightly better than expected, which leads some analysts to believe that the Federal Open Market Committee members pushing the Fed may now lighten up on quantitative easing.
According to Forbes, just days before Federal Reserve Chairman Ben Bernanke hinted that the Fed might slow down its asset purchasing program at the June 18-19 Fed meeting, smart money began for the very first time in years to borrow Treasuries from the Fed, paying a special fee of 25 basis points to do so, as they prepared to go short the market and wager that interest rates rise and bond prices decline.
This proved to be a very smart one indeed, as the yield on the 10-year Treasury note surged above the 2.00% level and cruised nearly to 2.20% by the end of May. As the Fed now owns 15% of all the Treasuries outstanding due to years of quantitative easing, borrowing bonds was not difficult.
The man behind this inside view of the bond market, Jim Bianco of Bianco Research in Chicago, Ill., is an expert on the fixed income markets.
"Bottom line they were not long Treasuries (but) itching to sell short, and started piling into short Treasury positions starting around May 22," Bianco said in an interview with Forbes.
"Bernanke's testimony was the game changer. On May 22 Bernanke added a new dimension to the decision, that the Fed would reduce or stop the Treasury buying if they perceive markets to be getting out of control."
When it comes to the reported losses in quantitative hedge funds in London, it is Bianco belief that they are more the result of futures positions in the Japanese government bond market and from the volatile movements of the yen.
After skyrocketing in price, due to an even more aggressive QE program of buying JGBs, the stock market and the yen have plunged steeply.
