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2 Year At New Record Low Yield As Fed Now Expected To Use Mortgage Prepayment Cash To Buy Treasurys
Jon Hilsenrath is out with the latest rumor of what the Fed will decide to do to stimulate a double dipping economy next week, and while it is already well known that Bullard is all for QE 2, and the idea of reducing the interest rate on excess reserves has been widely pondered and for now at least, snubbed, the WSJ confirms that the latest plan is to use proceeds from maturing mortgages to buy treasuries. The result: a 2 Year that is at a fresh all time record low yield of 0.542%, and a 10 Year flirting again with the 2.9% barrier. Stocks and bonds are once again terminally disconnected, as the market attempts to front run the Fed in buying up Treasuries, even as the marginal buying is occurring in stocks since the Fed has essentially announced that anything yielding less than 4% is risk free. Of course, as Jon points out: "Any change—only four months after the Fed ended its massive bond-buying
program—would signal deepening concern about the economic outlook. If
the Fed's forecast deteriorates significantly, it could also be a
precursor to bigger efforts to pump money into the economy...The Fed's mortgage buying pushed investors to buy other assets,
including corporate bonds and stocks. Any extension of that program,
even in the form of reinvestment, could help support the recent rally
in such riskier assets." So can we at least stop pretending the economy is not double dipping and that stocks are in way even remotely indicative of fundamental values. Tangentially, and as frequent readers will recall, any message from the WSJ is very likely to have had the prior stamp of approval of the New York Fed, implying it is vastly more than mere speculation.
With bond yields already at near record lows even without the benefit of Bernanke, one wonders how soon before we see 1% on the 10 Year:
Buying new bonds with this stream of cash from maturing bonds—projected at about $200 billion by 2011—would show the public and markets that the Fed is seeking ways to support economic growth. It could also be a compromise that rival factions at the Fed support, as officials differ about whether and how to address a subpar recovery.
Whether the Fed makes any move next week depends in large part on economic data, particularly the government snapshot of the jobs market due Friday. Since Fed officials last met in June, data on consumer confidence and spending have softened and job data haven't improved. But overall financial conditions have improved somewhat, with a rebounding stock market.
Um, no. Financial conditions have deteriorated as evidenced by the ongoing lack of credit where it counts as well as the 3 month deterioration in European overnight lending, indicative that absent the ECB's explicit backstop of everything, the European financial system would be dead right now.
Regardless, we can't wait to hear Hoenig's response: it would be quite amusing if the Fed president would resign in protest to this latest monetary insanity (just look at the EURUSD at 1.323 for confirmation).
Officials in the Fed's anti-inflation camp aren't convinced the economy is slowing significantly and are wary of taking new actions. Others are eager to consider new steps to address recent signs of a slowdown and persistent high unemployment.
Fed officials aren't yet prepared to take the larger step of resuming large-scale purchases of mortgage-backed securities or U.S. Treasurys. But they are holding open that option if the economy deteriorates. Private forecasters generally expect real GDP to grow by an annual rate of about 2¾% in the second half of 2010. If the picture deteriorates and they forecast growth falling below 2%, the Fed would be more likely to act.
One thing is certain: we will never see an orderly Fed rate increase in this lifetime. The next time the Fed is forced to hike rates will be after the tipping point of hyperinflation has come and gone, and as always, the Fed will be forced to chase market reality from a reactionary stance.
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If the Fed is essentially swapping matured MBS for treasuries, I dont se how this is QE2. Their balance sheet is unchanged, isn't that the idea?
Aren't they just avoiding tightening montary policy, not loosening it? I may be missing something...
They are once again a marginal buyer. And the expectation is they will buy on the margin when it suits them to push up risk assets.
Aaah, so the cash flows are something like
mortgage payment -> GSEs -> Fed (MBS holder) -> Wall Street (treasury seller) -> equities.
Hum, so the logical next step would be to count 401k holdings as an asset you could offset versus your mortgage. Coming soon to a presidency near you...
yes, and rumor has it that jobs are no longer relevant for housing
Tyler nailed it but they also understand that with foreign participation waning in our auctions, someone has to buy on the margins or the entire Ponzi scheme on Wall Street collapses. Without a housing recovery I expect the Fed to buy Municipal issues at some point in time also to prevent that market from collapsing.
FWIW, just printed 0.534%. Just wow.
So private forcasters expect real GDP growth of 2-3/4% for the 2nd half of 2010? What are they smoking?
Ben Bernanke & Fed = MAJOR FAIL
"Officials in the Fed's anti-inflation camp aren't convinced the economy is slowing significantly and are wary of taking new actions." Sorry, but what sort of indications are they looking for. Deflation, not inflation, is the imminent threat.
But I fail to see how this QE 2.0 does anything to affect the bulk of the American economy, that is, the one that does not live on Wall Street.
It does not it hurts them. it is in effect a propaganda exercise.
this I sent to paul krugman today.
Look, you ned to start to realize that when the stimulus ends up in the hands of the top 1% and i paid back by the bottom 50% it isn't a stimulus. Quant easing, the money ends up in bankers hands, same with low interest rates. we pay it back at higher interst rates (the bottom 50%). Note to self taxes are going up. For gods sake.wake up. I have no problem with a stimulus, but better to have none than one that goes into the bankers pockets that I have to pay back. Why do you think things aren't getting "better". Our government and the federal reserve run a masive ponzi scheme. take from the bottom and transfer to the top. Been going on for 30 years. read the stockman article of the weekend. the only people who keep ahead of inflation are those that benefit from cheap credit and leverage. the great majority loose. One of these days you are going to wake up and realize the solution of of you economists have to fix our problems just end up making us poorer in the long run. Been going on for 30 years. pay lower interest rates, devalue the currency. that benefits the top 1% much more than the bottom 50% who have little in stocks and only savings. for 30 years. When you going to wake up to the fact you are causing more harm than good. stick to your text books and please if you want to help, get the federal reserve audited, and poison you friend bernanke's coffee and the next department meeting. Not enough to kill him, but enough to make sure he can't run the federal reserve. http://www.zerohedge.com/article/most-wrong-thing-i%E2%80%99ve-ever-heard "I will make you better off, by making you poorer". Honestly it sounds like something you would read in the book 1984. IT DOES NOT WORK!!!! i WILL FIX YOUR ECONOMIC WOES BY MAKING SURE YOU MAKE LESS EVERY YEAR AND MAKING SURE YOUR SAVINGS DON'T KEEP UP WITH INFLATION. SEE HOW STUPID IT IS. But you have to understand. no matter what ben says the goal of the feeral reserve is to kill the dollr and cause inflation. that has been clear from day one.Pitchforks and torches marching up Liberty St.
I was looking forward to the elections this November but now I don't give a shit. We live in a democracy but all of the power is held by people who are in APPOINTED positions. Ben is spending money he doesn't have (proceeds from maturing mortgages SHOULD be used to offset losses!)to buy stuff (treasuries) which is likely to decrease in value long-term. Bernanke said he would do this a couple of weeks ago...the surprise is that it is a surprise to anyone.
The focus of our ire should be directed to those who are in the Fed, Treasury (yeah, Timmah is going to write the new 'resolution authority' rules...), the White House cabinet members, the propaganda spinning BIS, the inept (and tranny porn surfing) SEC lackeys, the corrupt CFTC, and any other 'appointed' fuckers! George Carlin was right. The politicians are in place to make us think that we have control...we don't!
I think they (Fed watchers) are looking at the wrong issue. China announced AGAIN yesterday they want to cut back on their Treasury buying. The Fed may be scrambling to plug that hole.
The Federal Reserve is a complete disaster.
Mission #1 - Price Stability - complete failure with volatile prices (is it deflation or inflation this week) and a dollar whose value has sunk 95% on their watch.
Mission #2 - Full Employment - even with their ignoring U-6 and doctoring the headline number - still a disaster.
Mission #3 - Lender of Last Resort but NOT to the U.S government (hence legal prohibition of Fed buying Treasuries directly from the Dept. of Treasury). They are buying Treasuries from the market after parking them briefly during auctions, loaning 0% reserves to primary dealers who buy Treasuries without any need to hedge duration, and buying agencies from foreign central banks who recycle proceeds into Treasuries. Using mortgage securities proceeds to buy Treasuries is another gaping whole in the monetization dike.