fed willing to buy US Treasuries?

Discussion in 'Economics' started by veritas007, Dec 2, 2008.

  1. I can't believe how insane fed policy action is getting. Greenspan caused this huge housing bubble. Now helicopter ben wants to inflate our way out of this problem. Recessions serve a purpose to get rid of excess. We need a recession, not another bubble.
  2. Since when has the fed ever done nothing about a recession? What country are you from? Buy gold if you aren't happy with a perpetually inflating money supply.
  3. Uhm, do you even have the slightest clue of how the monetary systems of US and every major nation work?

    Fed buying treasuries is the crux of it.
  4. The federal reserve doesn't buy 30-year treasury bonds. The federal reserve buys short-term treasury bills. Bernanke said Monday that he would buy 30 year treasuries to decrease rates. This is a major policy shift by the fed. Pay attention to the news once in awhile.
  5. The fed can buy whatever they want. Some respected economists are even suggesting they foreign nearer term debt as well. Anywhere in the treasury curve is acceptable. Take a look on econbrowser.com.

    In actuality, having them buy the long end will do a lot more to raise housing demand...

    Debt monetization for you.

    Seriously this isn't news. This was in Bernanke's 2002 'quivers in the arrow' speech concerning how to fight deflation.
  6. You do not know what you are talking about, but then, no wonder you are the only one shocked & outraged at these news.
  7. harkm


    Kind of funny how the treasury sells bonds and the Fed buys them....with printed money. So, obviously the Feds goal is to eventually sell the bonds to reverse the printed money. Right? This might be difficult for them to do for fear of damaging the economy again. The end result is a diluted dollar and rising gold. Is there any other way out?
  8. OVVO


    The Fed has been looking at this for some time now. This excerpt is from the Oct 2001 Fed meeting and you can basically substitute UST for JGB. This is part of the bank bailout plan.

    Staying with the Japanese markets for a bit on page two, the top panel shows the 5-year Japanese government bond (JGB) yield and the 5-year yen swap rate since January 2000. The middle panel depicts the 10-year JGB and swap rates for the same period. In both, the spread between the swap rate and the JGB yield trended near 25 basis points in early 2000, then began to narrow in late 2000 and early 2001 as yields started to fall and rates at the short end approached zero. By the summer, the 10-year differential went to zero and was even negative on some days. The 5-year differential narrowed a bit later and is now also near zero. So bank obligations in a country with known banking problems are being priced as substitutes for government credit. One interpretation would suggest that the market is already presuming that Japanese bank risk is sovereign risk. Another explanation can be found by looking at the flows that are creating this relationship. Japanese banks have been very large buyers of 5- and 10-year swaps. That is, they are receiving a long-term fixed rate and paying a short-term floating rate, which lately has been near zero. That is functionally similar to buying a JGB and financing it in the short-term repo market. The sellers of these swaps reportedly have been foreign commercial and investment banks. Japanese banks have added to their swap positions rather than purchasing more JGBs because of a preferential accounting treatment.

    With small probabilities that short rates will move higher any time soon, the situation probably does not pose near-term concerns. But Japanese banks do have a stake in spreads staying tight and, given that the banks are also large holders of JGBs, in rates remaining low. Ergo, one quickly gets into the circular logic of the situation. The possible need to clean up bank balance sheets may force the government to issue more bonds to finance that endeavor, which in turn will raise yields and inflict losses on banks holding large JGB positions and large swap positions as well.

    As for the markets' views on the state of Japanese banks, the bottom panel graphs the Tokyo stock exchange composite index and the bank sub-index. Both are down substantially since January of 2000. Interestingly, the bank sub-index has had its greatest underperformance in the last 12 months, precisely during the time that swap spreads began to narrow.

  9. The fed has been buying the 30 year for a few weeks now. The announcement is after the fact, but none-the-less, traders that pay attention have been making a killing anticipating this.
    #10     Dec 2, 2008