So far in its third quantitative easing effort, the Fed has been buying mortgage bonds. But the largest global bond traders say the Fed will begin to add Treasuries to QE3 by the end of the year as the recent strength in employment gains and consumer spending proves to be unsustainable.
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The Fed is not happy with the pace of the recovery. Its Operation Twist program is scheduled to end December 31. The potential fiscal cliff slowdown is expected to cause more stimulus action as the Fed confirms its dedication to doing whatever is necessary to get unemployment back to acceptable levels.
The primary characteristic of the Treasury market over the next few months is expected to be its low volatility.
The Fed is expected to buy $45 billion per month in Treasury securities over 2013. Tamer inflation is the cause of the low volatility. It also gives the Fed room to act
before any real threat of inflation kicks in.