When you increase demand for something, its price should go up.
In the case of bonds, if the demand for them increases, their price should go up, and their effective interest-rate yield should go down.
That didn't happen on Friday when the Federal Reserve began executing its second round of "money from nothing" quantitative easing. Even though the Fed increased demand, bond prices went down and yields went up.
Why? If you read a late Friday afternoon report by the Associated Press's Matthew Craft you essentially get a bunch of blubbering "I don't know" statements (bolds after headline are mine):
Treasury prices take a dive; Interest rates jump
The Federal Reserve put its latest stimulus plan into action on Friday, buying government bonds in the hope of lowering long-term interest rates. But instead of sinking, interest rates jumped.
The yield on the 10-year Treasury hit 2.78 percent, the highest level since Sept. 10. The two-year yield, which had hovered around 0.40 percent for months, rose to 0.51 percent, a large move for that security.
The Fed bought its first batch of Treasurys since announcing its $600 billion plan to boost the economy last week. The central bank picked up $7.23 billion in Treasurys coming due between 2014 and 2016.
Buying bonds on a large scale should drive down long-term interest rates. Pushing bond prices up knocks yields down, and Treasury yields act as benchmarks for other lending rates. But Treasury prices dropped after the Fed bought its bonds, sending their yields sharply higher.
What happened? "It's complicated today," said Guy LeBas, chief fixed income strategist at Janney Capital Markets. "There's just a lot going on."
A collection of trends and events arrayed against Treasurys. Worries Ireland would default on its debt eased on Friday. LeBas said that gave European government bonds a lift while diminishing Treasurys' appeal. As Treasury yields were climbing, Ireland's 10-year bond yield dropped from 8.89 percent to 8.13 percent.
Foreign central banks, reliable Treasury buyers, weren't around to help, said Tom Tucci, head of Treasury trading at RBC Capital Markets.
... Some banks decided it was time to sell. Tucci said central banks were dropping five-year Treasurys this week, a rare sight. "That's the first time I've seen central bank sellers in I don't know how long," he said.
Geez, an eight year-old kid can come up with more creative excuses than the ones LeBas and Tucci offered. An eight year-old can also probably come up with better excuses as to why his or her former friends don't seem to want to play games together any more.
I would also hope (probably in vain) that the AP can come up with a better term that "stimulus" to describe what Bernanke is doing. How about "electronically creating money"?
Let's buy Craft, LeBas, and Tucci a couple of clues:
C'mon, guys -- especially the AP's Craft. One or both of the aforementioned elephants is more than likely already in the room; if not, they're knocking very loudly at the door. Why not say so? It beats the heck out of insults to our intelligence like "it's complicated," and "there's a lot going on." Zheesh.
Cross-posted at BizzyBlog.com.