QE III and bond yields

There is a perhaps strategically overstated disagreement among enthusiasts for QE III about how it might help.  Woodford et al stress the importance of QE as a signal of precommitment to expansionary future conventional monetary policy which will act through short term interest rates when the FOMC will be inclined to raise them above the zero lower bound.  Gagnon et al stress the importance of portfolio balance effects — the shift in the supply of risky assets to the private sector which can affect prices and returns without affecting expected future monetary policy.  I stress that Woodford and Gagnon agree much more than they disagree.

It seems to me that QE III may provide fairly strong evidence about who is more right.  First QE III is based on purchases of fairly risky MBS not very safe Treasuries.  Those who stress portfoio balance must predict a larger effect than that of QE II (not a high bar to say the least).  In contrast the news has not had a large effect on long term bond yields which should consist of expected average future short term bond yields plus a risk premium.  In fact the 10 year bond yield was roughly the only asset price which didn’t jump dramatically on the news

Ten-year Treasury yields slipped three basis points to 1.73 percent after rising as much as seven points earlier. 

That’s 0.03%.  As of 16:59:46 EST Thursday  the 5 year rate dropped by a big big 0.0481%  .  

If  the event study approach were valid (the full effect and no more appears as soon as the news is public and pigs fly) and if the main effect of QE III works through expected future short term rates, then nothing much should happen (and this didn’t happen “The Standard & Poor’s 500 Index climbed 1.6 percent to 1,459.99 at 4 p.m. in New York “).  This paragraph is based on assuming that financial markets are efficient so it’s silly.

update:  it is now 6:53 EST.  According to Bloomberg.com the 5 year Treasury yield is 0.707%.  According to FRED Wednesday close was 0.7 % (seems to be rounded to the nearest basis point).  Again according to Bloomberg the yield is up 0.0692 % (I assume since Thursday close so up about 0.0211% since the announcement of QE III).  I assert again that expected future short term rates should affect the 5 year rate.  Also more certainty about future short term rates should reduce the risk premium.  I conclude that the forward guidance aspect of QEIII is miniscule and, not that it matters because it is so very very tiny, has the wrong sign.