Opening Comments December 16 2008
December 16th, 2008 8:56 am | by John Jansen |Prices of Treasury coupon securities edged lower to another set of historic low yields in overnight trading as market participants reflect on the possibility that the Federal Reserve will announce today that it will use its balance sheet as the blunt force instrument of monetary policy. Under this plan the federal funds rate would lose its status as the key variable in influencing policy. The FOMC would formally adopt the policy of quantitative ease as it battles the worst economic slump since Herbert Hoover occupied the Oval Office.The Federal Reserve has already begun a policy of quantitative ease with its recent announcement that it would buy $500 billion of MBS backed by the GSEs and that it would purchase $100 billion of direct obligations of the GSEs. The direct obligation purchases have begun and those purchases are unsterilized provisions of reserves.
That action was somewhat ad hoc and the market is looking for guideposts regarding how the FOMC will conduct policy under this new monetary regime. Participants will want to know what the FOMC will buy and what will trigger such purchases.
In overnight trading the yield on the 2 year note slipped one basis point to 0.73 percent. The yield on the 3 year note is unchanged at 1.01 percent. The yield on the 5 year note has dropped 3 basis points to 1.46 percent. The yield on the 10 year note also dropped 3 basis points to 2.48 percent .The yield on the 30 year bond dropped one basis point to 2.94 percent.
The 2year/10 year spread narrowed 2 basis points to 175 basis points.
Some expect that the Federal Reserve will also indicate that the funds rate will remain at levels at or near zero for a very long time. If that is the case then the flattening of the yield curve should continue with a vengeance. Investors searching for yield will scour the long end of the treasury market for yield and the curve should compress. I have noted several times recently the cheapness of certain off the run issues in the bond sector. I believe those issues will quickly return to fair value when the FOMC adopts this new regime.
Before the FOMC announcement later in the day the market will digest the CPI report and the monthly report on Housing Starts. The market consensus calls for bond friendly data in each instance.
4 Responses to “Opening Comments December 16 2008”
By Amicus on Dec 16, 2008 | Reply
scour the long end of the treasury market for yield
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It will be interesting to see if money flows into the credit market, once ‘the trade’ in treasuries has little prospect of improvement.
By Alex on Dec 16, 2008 | Reply
Quantitative easing to flatten the yield curve? Can deflation be fought off?
By Amicus on Dec 16, 2008 | Reply
For whatever it is worth, about half-way through the Japan lost decade, people were saying (circa 1997) that the BOJ should either have not cut to “zero” or should _raise_ rates, so that people could get some nominal interest.
By Joe on Dec 16, 2008 | Reply
I’m reminded of the line Lloyd Bentsen used in the infamous VP debate: “If you let me write $200 billion of hot checks every year, I could give you an illusion of prosperity, too.” (I googled it.)
Yeah, deflation can be stopped, but not by monetary policy alone.
In Japan at the peak, the average stock had a P/E exceeding 100, so their bubble was a lot “bubblier” than ours.