Tuesday, March 24, 2009

The Debts of the Spenders: Crowding Out the 30 Year Bond

I said it here a few days ago after the Fed unveiled its plan to buy government bonds. There are always consequences for government manipulation of the markets.

In this case, a lot of hedgie and mutual fund money is pouring into preferred bank stocks, corp bonds backed by the Fed, GSE debt (FNM and FRE bonds), and even municipal bonds.

This means FEWER buyers for Treasuries.

Leaving the Fed as one of the the biggest buyers (the other being China and Japan).

It may be too early to tell but it seems that the bond speculators have already left the boat. After all, why should investors lend money to Uncle Sam at <4% interest for 30 years when they can get better returns in other debt that is DE FACTO or explicitly guaranteed by the federal government?

Say hello to higher bond yields in the future. Of course the Fed can expand its purchases of longer dated issues but that is a very inflationary action.


In Debt We Trust said...

Of course, right after I said this, the Fed had to make an announcement that it would be buying longer dated bonds.

Which naturally led to a rush of speculators trying to front run the Fed's purchase.

But sustained buying pressure in the face of increasing supply is not viable longer term.

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