Thread by @kevinmuir

QT/QE lesson from Druck and what's really important with tomorrow's FOMC statement

Today's thread is about QE/QT and the non-intuitive market response to the Fed buying/selling bonds.

I have long argued that QE was BOND BEARISH - not bullish

1/ of 8

Now, I know most everyone thinks the opposite. The Fed buying bonds through QE? That must mean bonds are headed higher - after all there is all that extra demand out there. Even the Federal Reserve tells you in their research their buying lowered yield on bonds.

2/ of 8

Now, before you click to another tweet, let me play you a video of another "dumb money manager" who happens to feel the same way as me (make sure you have volume on):

3/ of 8

Druckenmiller: "QE buying bonds would be bearish for bonds."

His colleagues: "what is wrong with you?"

Well, let's "go to the tapes" and see how Druck's prediction turned out.

4/ of 8

Druck: "my theory was that QE - buying of the bonds by the gov't would cause risk to go up and decrease the demand for bonds from other entities.

Then the day we stopped QE, bonds went up, stocks went down.

I HAVE FOLLOWED THIS FOR 8 YEARS, AND IT WAS SEVEN FOR SEVEN."

5/ of 8

Druck: "I started worrying that QT was going to hit financial assets.

It's a very interesting environment to be doing Quantitative Tightening."

6/ of 8

So there you have it. Don't listen to me - listen to the best money-manager of all time.

***QE was bond bearish.***

Ending QT might not be the same as starting QE, but at the very least, don't assume the gov't stopping their bond B/S wind down will be BOND BULLISH.

7/ of 8

I think tomorrow's FOMC announcement is 25 bps cut and the fireworks might be in an acceleration of QT windup.

If that happens, DON'T ASSUME IT IS BOND FRIENDLY.

My bet is that outcome causes the curve to steepen and might even cause a sell off in long end.

8/ of 8