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Question about the Fed


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Why are they issuing $19 billion in 10 year notes today and $11 billion in 30 year notes tomorrow considering the discussion about quantitative easing?

 

If I get it right, issuing these long term treasuries creates an IOU which brings cash to the Fed and someone forks real dollars to pay for them. So it is neutral in terms of money supply. However, it creates additional supply which depresses the price of treasuries which in turn increases their yield creating a drag on the economy.

 

Again if I understand correctly, quantitative easing is the buy-back of treasuries by the Fed in order to shrink their supply. But, they are doing this without real cash on hand to buy them, so new "electronic" dollars are given to the seller. This increases money supply. The yield on treasuries should be reduced helping the economy, but the effect appears to be only temporary since there is inflation created at the same time eventually leading to higher yields.

 

Why are they not simply doing the quantitative easing thing if that is their intention? Why issuing and then buying back pretty much the same securities? Is it a game of issuing as much as possible now at "high" prices to buy it back later at lower ones?

 

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I think they need to issue large amounts of debt. What they are able to buy back is only a small amount compared to the total.

 

I am wondering if we are seeing 10 year Treasuries peaking here around 4%. If not, the resulting higher interest rates (for mortgages etc) will become a negative for the weak US economy. My guess is given the increasing supply of US debt (US deficits) and the apparent shrinking of demand (other countries diversifying out of Treasuries, investors shifting out of 'safe haven' Treasuries and into risk assets - stocks, corporate & international bonds) yields may surprise to the upside. I also wonder if FFH will shift back from municipals (realize massive gains ) to Treasuries... and wait for fear to return to markets (at which point demand for Treasuries will increase and yields will fall). I look forward to reading Vanhoisington's Q2 report.

 

I think the Fed's perspective is Treasury yields would be higher if they had not engaged in quantitative easing to this point...

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Thanks Pof4520,

 

That makes sense now. I had merged the Fed and the Treasury Department.  :-[

 

I have been thinking too much about that stuff lately: inflation, interest rates, currencies and consequences of something like a long term bear in treasuries. It would be nice to totally ignore, but even in a bottom up analysis, you have to somehow figure out the business direction and if there is debt inside the corporation what interest rates are likely to do.

 

I am also trying to figure out if we are heading into another crisis that few are thinking about now. Guys like John Paulson and Kyle Bass were betting heavily on credit default swaps since they saw the coming debacle due to securitization. Now, they are both heavy in gold. We can also add David Einhorn to that list since he did find many holes in the financial system and is now also heavy into gold.

 

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