Monetizing Debt

April 2nd, 2009 11:53 am | by John Jansen |

The Federal Reserve is busy monetizing the debt. They bought about $ 7.5 billion of securities out of the $ 26.252 billion offered to them. The overwhelming portion of the purchase was concentrated in two issues: the 1 3/4 March 31 2014 (current 5 year $ 4.35 billion) and the 1 7/8 February 2014 (old 5 year $ 2.8 billion).

Why are the so aggressively purchasing on the run and recent on the run issues to the detriment of of the run securities?

One trader opines that the stated purpose of the program is to force rates lower to reduce rates for borrowers. Most pricing is tied to on the run issues. Purchases of off the runs will tighten spreads between on the run and off the run paper.  but it will not lower rates to borrowers.

Since (allegedly) the Fed’s purpose is to lubricate the credit markets, then it makes more sense to but the on the runs as they did today.

The market is cratering following the buyback. I think some traders are lugging off the runs and are experiencing full throated embarrassment at owning the wrong issues. Those traders are probably setting new hedges as we speak.

The stock market continues to roar and euphoria is everywhere in the air. I am sure that has diminished the safe haven bid for treasuries, too.

Be Sociable, Share!
  1. 14 Responses to “Monetizing Debt”

  2. By Dr.Dan on Apr 2, 2009 | Reply

    Treasury has an incentive in keep the Stock market low..otherwise there would be Zero demand for treasuries.

  3. By ben stein on Apr 2, 2009 | Reply

    I’m a newbie to your site and trying to learn and I have a question. What is the “1 3/4” and “1 7/8” means in your statement?

    Original statement.(the 1 3/4 March 31 2014 (current 5 year $ 4.35 billion) and the 1 7/8 February 2014 (old 5 year $ 2.8 billion).)


  4. By Brian on Apr 2, 2009 | Reply

    I agree Dr. Dan. The Treasury has put itself in a “damned if you do, damned if you don’t” situation, where an equities rally is needed, not only to improve the psychology of the economy, but also to help ensue stability and in the marketplace; the exact opposite effect needed to sustain demand for the safe haven Treasury bid.

  5. By Shrek on Apr 2, 2009 | Reply

    They dont have a F$cking clue whats going on. Bernanke is clueless. Is the idea to get rates super low so we can have an artificial boom and then super collapse?

  6. By Kevin Mackey on Apr 2, 2009 | Reply

    Immediately following his terrible bank plan speech in February, I suggested that Geithner intentionally tanked so the market would sink and they could unload the new supply of Treasuries cheaply. I think I was wrong about that (although there may have been political elements of his bad performance relating to the passage of the stimulus bill), as he has since improved his speaking and has introduced the initiatives the market was waiting for in the original speech.

    To get to my point, I think they can have both a stock market recovery to help with psychology and have rates still stay relatively low. Considering their blatant debt monetization, the massive issuance all across the board, and mind-boggling balance sheet expansion in such a short period of time, a 2.739 yield on the 10 year really isn’t that bad.

  7. By John Jansen on Apr 2, 2009 | Reply

    Those are coupons on the bonds.

  8. By Brian on Apr 2, 2009 | Reply

    Kevin I cant say that I agree with you, just look at the magnitutde and direction of the moves between today and when the Fed initially announced their QE plans: the 5yr leapt almost 40bps merely on the news (amidst a much more subdued equity rally) and today, the Fed takes almost 30% of the street’s offer and coupled with enormous widespread optimism (as ill-founded as it is) in the equity market, the 5yr is off 10. If equities do bottom and continue their upward march, the prevailing bullishness will not only foster increased yield appetite, but also willingness to take more risk in general. Remember, the market has a short memory.

  9. By Bman on Apr 2, 2009 | Reply

    I feel that the Fed’s main objective is to keep rates low in the simple goal of trying to finance the massive debt burden without worrying China, Japan, etc… Apologies for run-on sentence.

  10. By John Jansen on Apr 2, 2009 | Reply

    At least you didnt use as many parentheses as i do!!!

  11. By Bman on Apr 2, 2009 | Reply

    when there is substance (like you have), you are allowed.

  12. By Nancy on Apr 3, 2009 | Reply

    Thanks for Another bit to make me think. Gives me something to WHINE about (this is a hint).


  1. 3 Trackback(s)

  2. Aug 7, 2009: "Monetizing the Debt: Disinformation in the Blogosphere" |
  3. Aug 7, 2009: Zero Hedge Trips Over Itself | But Then What
  4. Aug 8, 2009: John Jansen Calls Out Tyler Durden for Spreading Disinformation

Sorry, comments for this entry are closed at this time.