Bond Market,The Fed and QE

March 18th, 2009 5:13 pm | by John Jansen |

The Federal Reserve announced that they will purchase $300 billion of Treasury securities. They also noted that they will concentrate their purchases in the 2 year through 10 year sector.

I think that within that framework they will concentrate purchases in the 2 year through 5 year sector. I am confident that the Committee desires a steeper yield curve as it allows banks to borrow short and lend long.So that action will directly benefit banks and other financial intermediaries.

By concentrating in the shorter end they also provide themselves with a nifty exit strategy. Shorter paper matures and they will be able to roll that stuff off at maturity. If the central bank had bought 20 year and 30 year paper, then when the time arrives at which they must unwind these emergency transaction they would need to come into the market to sell longer dated Treasuries. That could be a messy undertaking.

In addition, pension fund and money managers who have need of longer term assets also need a modicum of yield. If the Federal Reserve were actively engaged buying the longer assets, it would reduce the opportunity and the yield for other end users.

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  1. 13 Responses to “Bond Market,The Fed and QE”

  2. By apartamentos on Mar 18, 2009 | Reply


  3. By gab on Mar 18, 2009 | Reply

    To say nothing of the fact that if they owned the longer stuff, at some point, most likely when rates were going up, they would also be sellers. At least with the shorter stuff, they can just hold it to maturity.

  4. By Kicker on Mar 18, 2009 | Reply

    Selling long term paper in a rising interest rate environment could mean steep losses. I doubt the Federal Reserve could eat those losses without the help of the Treasury.

    The other option is for the Treasury to dump a trillion dollars of new paper on the market and let the money sit in their account with the Fed.

    Either action results in a loss to the US tax payer.

  5. By BL on Mar 18, 2009 | Reply

    Presumably we tax payers would pay it back with dollars that were easier to come by….


  6. By Sandra on Mar 18, 2009 | Reply

    I was wondering if you have looked at how the UK has fared since they started QE, and what that may mean for the US. I see 10 gilt rates of around 3.65 before which came down to 2.95 after QE was announced, but is now back up to 3.11. For the 30 year gilt, I see 4.34 to 3.95 and now back up to 4.11. Do you expect a similar selloff in the 10s and 30s from today’s low yields?

  7. By kmw on Mar 19, 2009 | Reply

    It’s only fitting that the Fed buy this paper. After all, no one else wants it, it’s not worth anything, and the Fed isn’t really giving anything of value in return. Seems a fair trade, no?

  8. By Steve on Mar 19, 2009 | Reply

    While we can call it “quantitative easing”, one word adequately and accurately describes the Fed’s latest policy tactic: INFLATE!

  9. By Fullcarry on Mar 19, 2009 | Reply

    I think they should buy more TIPs. TIPs would naturally be more desirable once accelerating inflation becomes embedded and they want to unwind their programs.

  10. By Keith Wright on Mar 19, 2009 | Reply

    Interestingly, and probably not coincidentally, most mortgage rate models I know of take the 2 and 10 year treasuries as an input. I think there is some attempt here to get rates down to 4%

  11. By Fullcarry on Mar 19, 2009 | Reply


    And don’t forget the convexity adjustment the mortgage guys had to make. The FED sc***ed them over.

  12. By Fullcarry on Mar 19, 2009 | Reply

    John, Sorry about the previous comment. Feel free to remove it.

  13. By John Jansen on Mar 19, 2009 | Reply


    You are forgiven. Can you email me on something?

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