Late in the afternoon today (July 24th) word came via Bernanke pal Jon Hilsenrath that the Fed could be moving closer to taking additional actions to spur growth.  There’s little doubt in my mind that this is indeed the case.  In a recent note Bridgewater estimated that in the past few months global growth has slowed from a 3.3% rate down to 1.9%.  This lower global growth should inevitably also cause lower inflation, leading developed market central banks to loosen policy via Quantitative Easing while emerging market central banks choose rate cuts.  Whether you agree with these policies or not, I believe recent economic developments will cause the Fed to act.

Astute observers have noted that the recent plunge in US Treasury yields has primarily been a decline in real yields.  Ten year break-evens, as an example, have declined only ~20bps since May down to 2%.  Ten year nominal yields have dropped over 50bps in the same time period falling under 1.40% as of today’s close.  Despite Chairman Bernanke profession that “additional tools” remain in play, I believe we will see additional large scale asset purchases “LSAP’s” in the form of Agency Mortgage Backed Securities.  What will this accomplish and how is it different than last time?

Just as the repeated usage of an anti-biotic can have diminishing benefits, I believe that the impact of QE too will see a diminished impact.  Here’s two reasons why:

1.)  Little impact will flow through to mortgage borrowers