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Tuesday, 7 April 2009
Fed’s Effort To Roll Snowball Uphill Is Failing
Bernanke thinks he can manipulate treasury yields by purchasing long dated treasuries. He can’t. The market is simply too big. Please consider Treasurys slide after Fed purchases.
Bernanke thinks he can manipulate treasury yields by purchasing long dated treasuries. He can’t. The market is simply too big. Please consider Treasurys slide after Fed purchases.
Treasury prices slipped lower Monday, with longer-term debt reversing earlier strength, after the Federal Reserve purchased $2.53 billion in Treasurys maturing between 2019 and 2026.
Investors remained wary of buying before the Treasury Department auctions $59 billion in new debt this week.
Fed purchases last week did little to keep Treasury yields down, as equity gains and data revived some optimism among investors. A dismal monthly payrolls report on Friday was better than the even grimmer report some investors had braced for. Ten-year note yields increased 15 basis points last week, pushing back towards levels last seen before the Fed surprised markets after its last policy meeting by announcing it would purchase $300 billion in Treasurys in the following six months.
“The Fed’s problem is that the market realizes that $300 billion in Treasury buybacks is just a drop in the bucket compared to $2.5 trillion in estimated net Treasury issuance this fiscal year,” said strategists at UBS Securities.
UBS has it wrong. The Fed’s problem is that it cannot force rates where it wants no matter how many treasuries it buys, short of owning them all. If the Fed is buying treasuries at an unnatural price, supply will be unlimited. For more on this line of thinking, please see Quantitative Easing Begins; “Operation Twist” Revisited.
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Fed’s Effort To Roll Snowball Uphill Is Failing
Bernanke thinks he can manipulate treasury yields by purchasing long dated treasuries. He can’t. The market is simply too big. Please consider Treasurys slide after Fed purchases.
Treasury prices slipped lower Monday, with longer-term debt reversing earlier strength, after the Federal Reserve purchased $2.53 billion in Treasurys maturing between 2019 and 2026.
Investors remained wary of buying before the Treasury Department auctions $59 billion in new debt this week.
Fed purchases last week did little to keep Treasury yields down, as equity gains and data revived some optimism among investors. A dismal monthly payrolls report on Friday was better than the even grimmer report some investors had braced for. Ten-year note yields increased 15 basis points last week, pushing back towards levels last seen before the Fed surprised markets after its last policy meeting by announcing it would purchase $300 billion in Treasurys in the following six months.
“The Fed’s problem is that the market realizes that $300 billion in Treasury buybacks is just a drop in the bucket compared to $2.5 trillion in estimated net Treasury issuance this fiscal year,” said strategists at UBS Securities.
UBS has it wrong. The Fed’s problem is that it cannot force rates where it wants no matter how many treasuries it buys, short of owning them all. If the Fed is buying treasuries at an unnatural price, supply will be unlimited. For more on this line of thinking, please see Quantitative Easing Begins; “Operation Twist” Revisited.
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