Discussion of “The Effects of Quantitative Easing 

on Interest Rates: Channels and Implications for Policy” 

by Krishnamurthy and Vissing-Jorgensen

Second Annual Roundtable on Treasury Markets and Debt Management 

November 15, 2012

Discussant: Matthew Raskin, FRBNY
Disclaimer: 

The views that I express are my own and do not necessarily represent those of the 

Federal Reserve Bank of New York or the Federal Reserve System.
Overview

• Very nice paper with important implications for current Fed policy

– Open-ended agency MBS purchases; upcoming conclusion of program to extend maturity of Treasury 

portfolio; market participants place high odds on additional Treasury and MBS purchases in 2013

• Clear and intuitive framework for evaluating the effects of the channels through 

which asset purchases – QE if you like – affect various interest rates

• Focus my discussion on the signaling, duration risk, and safety channels

– Key ingredients to implicit conclusion that when liquidity is ample, Treasury purchases that don’t 

alter expectations for the target rate, corporate defaults, or inflation only affect “safe” assets

• Interesting insight into fixed-income markets; particular policy relevance
Signaling Channel

• Define signaling channel as change in expected target rate path around QE events

– Signaling can also affect uncertainty about the target rate path and thus term premia

• Measure change in expected target rate path using implied rates on fed funds 

futures out to two years + assumptions

• Assumptions are transparent and result in plausible estimates, but essentially ad-hoc

– 2nd Method: Measure shift in timing of tightening due to QE, assume target expected to be held at 0% 

instead of 4% for that length of time, integrate to find effects on longer-term yields

– Weird expected path!
Signaling Channel (cont’d.)

• Assume zero changes in fed funds futures risk premia – how far out is that tenable?

– With longer-term OIS would attribute nearly all QE effect on Treasury yields to signaling channel

– Evidence from MEP announcement reveals supply effects on even short-dated futures risk premia

• Estimated effects on expected target rate path aren’t necessarily due to QE; 

contemporaneous FOMC actions and communications surely altered expectations

– December 2008 FOMC: target rate lowered to 0 to 1⁄4 percent, “exceptionally low...for some time”

– March 2009 FOMC: “exceptionally low...for an extended period”
Safety/Duration Risk Channels

• CDS-adjusted Baa corporate bond yields did not fall by more than the estimate of 

the effects of the signaling channel  no duration risk channel operative

• Conclusion implies that when liquidity is ample, Treasury purchases that don’t alter 

expectations for the target rate, defaults, or inflation only affect “safe” assets

• Strong conclusion about market segmentation. How robust is it?

• Questions about details of the CDS-adjustment to Barclays’ corporate bond indices

– How well-matched are the samples of companies?

– How well-matched are the maturities of the bonds and CDS?

– Barclays’ indices include senior and subordinated bonds, and bonds with call/put provisions

– Worth thinking about whether these details matter
Safety/Duration Risk Channels (cont’d.)

• Large variation in changes in CDS-adj yields for Baa, Ba and B ratings categories

• Each of these ratings categories is presumed to have zero safety premia

• Variation implies factors other than safety premia drove changes in CDS-adj yields 

on QE days. Why assume net effect of these other factors is precisely zero for Baa?
Safety/Duration Risk Channels (cont’d.)

• Alternative identification of safety premia, suggested by K-VJ: difference b/w 

Treasury yields and rates on derivatives with similar short-rate exposure

• Maturity-matched Libor swap and OIS spreads indicate limited safety channel effect

– Robust to controlling for credit risk in the underlying reference rate on Libor swaps (3-month Libor)

• Maybe swaps also have safety premia. If so, why don’t Aaa-, Aa-, A-rated CDS?

2-day Changes in 10-year Rates and Spreads (bps)

10-year Rates 10-year Spreads

Tsy Swap OIS Tsy-Swap Tsy-OIS

Sum QE1 -105 -101 -92 -4 -13

Sum QE2 -27 -27 -27 0 0
Local Supply Effects/Preferred Maturity Habitats

• Evidence from QE events indicates signaling and duration risk channels together 

are not sufficient to explain movements in Treasury yield curve

• Local supply effects, concentrated in sectors of Treasury yield curve where the Fed 

is expected to buy or sell

• Effects pass-through to other benchmark rates – e.g., swaps – that are not obviously 

safe, and are used to price a very broad range of USD fixed-income assets

• Does this evidence fit easily into the K-VJ framework? Not obvious – at least calls 

for more explicit focus on preferred maturity habitats within the class of safe assets
Timeline of August 2010 FOMC-Related Announcements

• 2:15pm: FOMC statement: reinvesting agency principal into “longer-term Treasury securities”

• 2:45pm: Open Market Desk at FRBNY technical statement: Desk will “concentrate its 

purchases in the 2- to 10-year sector of the nominal Treasury curve”

• FOMC statement reportedly surprised markets

• Desk statement reportedly led markets to revise down expectations for purchases of 

Treasuries with > 10-years to maturity, and thus expectations for duration removed

– Duration risk channel effect should lead Treasury yields across the curve to rise
Treasury Yields around August 2010 FOMC

-10

-8

-6

-4

-2

0

2

4

6

1:00 PM 1:30 PM 2:00 PM 2:30 PM 3:00 PM 3:30 PM 4:00 PM

change vs. 

2:10pm, bps

2-year

5-year

10-year

30-year

Desk

Statement

FOMC 

Statement

Source: Bloomberg
Libor Swap Rates around August 2010 FOMC

-8

-6

-4

-2

0

2

4

6

1:00 PM 1:30 PM 2:00 PM 2:30 PM 3:00 PM 3:30 PM 4:00 PM

change vs. 

2:10pm, bps

2-year

5-year

10-year

30-year

FOMC 

Statement

Desk

Statement

Source: Bloomberg
Treasury Yields around September 2011 FOMC (MEP)

-50

-40

-30

-20

-10

0

10

0 6 12 18 24 30

2d change, bps

maturity (years)

0- to 3-years (sales)

3- to 6-years

6-years + (purchases)

Libor Swaps

Sales Purchases
Summary

• Great paper. Rich with evidence on QE effects on broad array of interest rates

• Very useful framework for thinking about channels and comparing effects of 

Treasury and agency purchases

• Skepticism re: conclusion about pass-through of Treasury (and MBS) purchases

• Some interesting evidence around the safety/duration risk channels that I’d like to 

see the paper confront

• Evidence suggests value in further analysis of safety premia

– More explicit emphasis on preferred maturity habitats within the class of safe assets

– Are interest rate swaps safe?
Additional Slides
Change in ED8 around the Sep 2012 MEP announcement

0.56

0.58

0.6

0.62

0.64

0.66

12:30 AM 3:30 AM 6:30 AM 9:30 AM 12:30 PM 3:30 PM

percent FOMC 

Statement

Source: Bloomberg
What About Conventional Monetary Policy?

∆corp_bondn,t = a + b*∆targett + c*∆cdsn,t + et

∆targett = 30-minute change in 2-year Treasury yield around FOMC

∆cdsn,t= 1-day change in median CDS spread by category

∆corp_bondn,t = 1-day change in corporate bond yield by category (Barclays, BoG)

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

Aaa Aa A Baa Ba B

ratings category

Estimate of b:

Barclays Bond Yields

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

Aaa Aa A Baa Ba B

ratings category

Estimate of b:

BoG Corporate Bond Yields
Treasury Yields Reaction to September 2011 FOMC (MEP)

-50

-40

-30

-20

-10

0

10

0 6 12 18 24 30

2d change, bps

maturity (years)

0- to 3-years (sales)

3- to 6-years

6-years + (purchases)

Libor Swaps