Big risk-on day, as the market starts hearing rumors about additional easing. It started with yesterday's FOMC Minutes, which had this little nugget in it.
And is continuing today with Ben Bernanke's testimony before Congress, where he has so far said that the economic weakness appears temporary, but the Fed stands ready to act should deflationary pressures appear.
In the past, the Fed has acted when 10 year bond yields fell below 2.5%. One would think that the Fed's buying of Treasuries would depress yields, but it actually moves the market out of bonds and into riskier assets. The real demand for bonds comes from the flight to safety trade, which happened last year and is happening again as easing expires.
The above chart is a month old, but 10 year yields are currently still trading at 2.95%. If the trend continues, QE3 could be right around the corner. QE2 was announced at the annual global central banking conference at Jackson Hole last August.
Many feel that QE3 will take the form of interest rate targeting, where the Fed would put a cap on interest rates for Treasuries of a certain maturity. Bernanke himself outlined such a program in a 2002 speech about fighting deflation when he was still a Fed Governor.
Such a program would not have a specific duration or amount of easing, which would cause the Fed to lose control over the size of its balance sheet.