Quantitative easing is forcing investors into riskier assets as Ben Bernanke and the FOMC attempt to manufacture some inflation and after the US Dollar weakness.  We are seeing big moves in gold and oil as a result, but yesterday’s bond market reaction on the longer end of the yield curve was a fairly large tell about what investors are thinking.  We had previously shown more ETFs that were plays for or against the effects of QE2, but this morning the focus is on gold, oil, and long-bonds.  We took a snaphot of the markets after stocks opened and NYMEX Crude was at $86.43, up 2% or $1.74 per barrel; Comex gold was higher again at $1378.09, up 1.65% or $22.60 per ounce, although it has traded above the $1,380 per ounce mark this morning.

The SPDR Gold Trust (NYSE: GLD) is king of gold ETFs with millions of shares traded each day and with assets above $55 billion; its shares this morning are up 2.3% at $134.68.   The leveraged ETF is really moving: PowerShares DB Gold Double Long ETN (NYSE: DGP) is an exchange-traded note rather than a true asset trust with physical gold, but it is up 4.75% at $40.53.

Oil is higher again this morning and back above the $86.00 per barrel mark.  The three biggies here are the United States Oil (NYSE: USO) as the crude oil ETF, Oil Services HOLDRs (NYSE: OIH) as the oil and gas service companies ETF, and the ProShares Ultra Oil & Gas (NYSE: DIG) as the oil and gas drillers.  USO is up 1.5% at $37.29; OIH is up 2.2% at $124.80; and DIG is up almost 3% at $37.08.

Two days ago, the on-the-run 30-Year Treasury Bond had a yield of 3.93%.  After QE2’s announcement showed a table indicating long-bonds were barely a target of the FOMC, the yield rocketed up to 4.06%.  While that yield is a tad lower this morning from bond prices ticking up marginally, the ProShares UltraShort 20+ Year Treasury (NYSE: TBT) rose almost 4% yesterday to $34.66 because it is the double-short ETF against the Barclays Capital 20+ Year U.S. Treasury Bond Index.  Due to the bonds recovering marginally, its price is $34.46 this morning after the open.

What does very low yields on bonds mean with higher inflation?  The FOMC seems to have a 2% inflation target… You have to go out to the 10-Year T-Note to get above the 2.00% yield levels now.  The 5-Year T-Note yields barely 1%.  That means that all short-term and intermediate term Treasuries are trading at negative yields on a real return basis if you adjust for inflation.  Nice.

The economy is still holding up, and the fears of deflation seem overblown after commodities have risen as the dollar has weakened.  There is “the chicken versus the egg” argument over which came of course because the commodities rose and the dollar weakened in anticipation of QE2 effects.  Our take on manufactured inflation, “Be careful what you wish for…”

JON C. OGG

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