Michael S. Rozeff
The LRC blog 
Sunday, September 16, 2012
Bernanke thought that by buying mortgage bonds, mortgage yields would drop. And they have, but only very slightly. The mortgage bond fund, MBB, is just over 109, where it was in late July. He’s already wrong on that. But, wow, look at the government bond security, TLT. It took a big beating from QE3. In the last 9 days, it fell 10 points, from 128 to 118. The 0.6% inflation number for August played a part, but not that much. The inflation-protected bond (TIP) rose by about 1 percent to a new high.
With government bonds falling in price and inflation-protected bonds rising in price, inflation expectations have rapidly shifted higher. This means that QE3 is driving up government bond yields and the costs of government borrowing. QE3 is going wrong already in this respect. Government bond yields higher is a far larger negative to the government than any miniscule decline in mortgage yields. The higher inflation that is expected need not accompany any decline in the unemployment rate. That’s a Keynesian Phillips Curve dream. Instead, Bernanke is generating stagflation. When the FED buys bonds and the bonds go DOWN in price, it’s because the bond prices are pricing in higher inflation. That’s what appears to have happened this past week or so.