The Federal Reserve is determined to drive down bond yields but it looks like the so-called QE2 Treasury bond purchases have had the opposite effect, big time. The benchmark 10-year Treasury was yielding 2.47 per cent at the end of August as it became clear the Fed would act. Two weeks after the actual announcement, the yield is 2.92 per cent.

This need not imply total failure for the Fed. Investors sold bonds in response to new information. Namely, the actual QE2 programme was more conservative than some had hoped and aggrieved words from several Fed governors suggested that there was very little chance of QE3, and even some chance of a curtailment of QE2. Then, the data on the US economy were decent, always a reason for bond yields to go up. Finally, the Fed can interpret rising long-term yields as a sign of expectations of higher inflation, just what the central bank, scared of deflation, wants to inculcate. Certainly, the increase in yields need not imply any concern about Uncle Sam’s ability to pay.

But this explanation is disquieting. First, the divided Fed is likely to get more divided, since more hawks will get a vote on monetary policy in 2011. That means uncertainty and volatility. The market can no longer be sure that the Fed is committed – and the policy, always a long shot, is unlikely to work if there are such doubts.