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End of QEII Like Daddy Warbucks Leaving Store: Pimco

Friday, 1 Jul 2011 | 8:20 AM ET

The end of the second round of quantitative easing in the US has been likened to a department store's biggest customer leaving the store by Tony Crescenzi, a strategist at Pimco.

Ben Bernanke press conference following rate decision.
CNBC
Ben Bernanke press conference following rate decision.

"Picture a department store where a few customers are inside standing by the store shelves waiting for new inventory," he wrote in a note. "A truck is outside – it’s the Treasury truck, and it is back again at the store to unload a fresh supply of treasurys to refill the store’s emptied shelves."

The Federal Reserve halted its increased buying of Treasury debt, also known as quantitative easing, at the end of June.

The $600 billion easing programme was designed to give the US economy a soft landing from the credit crisis.

"The store’s biggest customer, the Fed, quickly grabs about 70 percent of the supply. The remaining buyers compete for the scraps that are left," wrote Crescenzi.

"Doing the math, it is easy to see why the remaining buyers have been willing to pay up to own Treasuries – the Fed has left them with slim pickings worse than the scramble by people piling into a Wal-Mart on Black Friday at 3 am to fill up their carts before others do. It’s human nature to want what others have."

Fed Chairman Ben Bernanke signalled in June that there were no current plans to expand quantitative easing.

Crescenzi compared the conclusion of the plan to: "The store’s biggest customer with the fattest wallet leav(ing) the store."

There won't be any immediate effects of the ending of the programme, according to Crescenzi, because the Fed has "cleaned out the shelves".

"The remaining buyers therefore dash to the shelves and scurry to buy whatever the Treasury truck delivers," he continued.

"As the days pass, the Treasury truck keeps on backing into the store to deliver a fresh supply of Treasuries as it must because with a $1.4 trillion budget deficit, the there are a lot of treasurys to unload and find buyers for.

"Soon enough, the shelves fill up and the stock effect becomes a negative for prices, all else equal of course, and so long as Daddy Warbucks stays out of the store," he wrote.

"It is likely that over time the attractiveness of these assets will wane," he concluded, adding that the US dollar's status as a reserve currency would also be hampered by the end of the programme.

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