With QE2 coming to an end, and everyone trying to figure out what that means to markets (possible spoiler alert: stocks are going down, and bonds are going up), one way to approach the question is to look at what QE2 actually did.
That's what Goldman Sachs' Alec Phillip did in looking at the Fed's latest Flow of Funds for signs of what QE2 did.
To evaluate how different sectors reacted to QE2, we compare average quarterly flows into Treasuries from each sector in Q4 2010 and Q1 2011 against the average flows from those sectors over the prior year. To compensate for lower Treasury issuance in the latter period, we adjust the flows for average issuance in the period. The change in relative Treasury demand can be used to approximate the difference between the amount of Treasuries that each sector would have bought or sold over the last two quarters absent the Fed's purchases, and what they did buy or sell on average in Q4 2010 and Q1 2011.
...over the last two quarters, the most significant sources of net supply for Treasury securities were households (note that this includes hedge funds), the foreign sector, and banks. The only significant source of new net demand was money market mutual funds, which went from a net seller in the previous period to a net buyer on average over the last two quarters.
Now as for what those sectors did with their money...
So where did sellers of Treasuries invest their funds instead? The sectors that reduced purchases of Treasuries noted above shifted funds into agency-backed securities (this includes agency MBS and debt), corporate bonds, money market funds, and mutual funds. Notably, there was little change in either consumer credit assets or mortgage loans, and sectors responsible for the greatest relative outflows from Treasuries during the period as a whole also reduced investment in equities relative to the average flows over the previous year (i.e., Q4 2009 to Q3 2010).
