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Wednesday, March 18, 2009

Why is the Fed Buying Long-Term Treasuries?

It has finally started . . . the long-threatened purchase by the Fed of long-term U.S. treasuries.

The Federal Open Market Committee announced today:

To help improve conditions in private credit markets, the committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.
This may be an attempt to prop up the bond market so that bondholders don't take a big haircut, and to lower the costs of corporate and mortgage debt (often called "quantitative easing").

As CNN wrote Monday:

If the Fed started buying 10-year Treasury notes, that wouldn't do anything to reduce risk tied to soaring U.S. budget deficits.

But it would provide some support for the value of the bonds, especially if the Chinese start to pull back on purchases as some economists are expecting. ...

What's more, a large purchase by the Fed would help to lower the rates on longer-term Treasurys and other debt that is tied to the bond market, such as some corporate debt and mortgage loans. (Bond rates fall when prices rise.)

Former Fed Governor Lyle Gramley noted the Bank of England's announcement that it would buy about $100 billion in British government debt earlier this month was enough to lower long-term rates by a quarter-point to a half-point, even before the purchases started.

More on this topic

The Fed Must Be Crazy(Top Gun Financial Planning, 3/18/09)
Daily Forex Commentary for March 18, 2009(Oxbury Publishing, 3/17/09)

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