Tuesday, November 16, 2010

Bond Market Defies Fed

So says the headline of today's Wall Street Journal.

The article starts off by suggesting that interest rates rising despite the Fed's purchases defeats the purposes of the policy--lower long term interest rates. Of course, later in the article it does mention that "rosier economic data" as being a possible cause of the higher rates.

But I would like to focus on one of the last paragraphs of the article. "Corporate bond issuance has been heavy since the Fed announced its bond-buying plan, which often leads to a temporary selloff in Treasuries." Now, how does that work?

Corporations are selling newly issued bonds, which should raise the rates. People who currently own Treasuries sell them to obtain funds to purchase the new corporate bonds, which dampens any increase in the rates on the corporate bonds. The Fed buys some of the Treasury bonds being sold with newly issued money, and so dampens the increase in interest rates for the Treasuries and corporate bonds.

The only message I would take from this headline is that the Fed needs to quit focusing on interest rates. The purpose of quantitative easing isn't to lower interest rates compared to their current levels. Maybe BAA corporate rates still need to fall, but most interest rates should be higher. The purpose of quantitative easing is to raise money expenditures. And, hopefully, to raise real output and employment.

1 comment:

  1. We got to be extremely sharp with keeping eye on these things; I believe Fed decision can make huge difference, so keeping focus on it is extremely necessary. I don’t worry too much about anything of that sort, as I have ideal support in OctaFX which covers it all for me. They have epic daily market news updates which are very effective and helps understanding things so much better, so that’s why I am able to perform really nicely in any situation.