Preview: The Fed and The Bond Market

February 7, 2009 · Posted in Uncategorized 

We have added the new Member’s Only Post “The Fed and the Bond Market”

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We will be publishing our weekly market review free content tomorrow and an Additional Member’s Only Post on China’s role in the credit crisis later this week. Monday, we will also publish a critique of the bank rescue plan to be unveiled by Secretary Geithner on Monday.

Excerpt from “The Fed and The Bond Market - Will Intervention be Effective?”:

It appears we are approaching a level of interest rates in US Treasuries that could prompt the Fed to intervene by buying US Treasuries in quantity in an effort to drive rates down. In the following we look closely at the situation facing the bond market, the options the Fed has, and the likely impact on the bond market should the Fed attempt intervention. Finally, we will break this analysis down into a sequence of signals and actions that we will be taking to best manage our open positions in the Treasury market.

First let’s look at the Treasury market situation as of Friday, Feb 6. The January unemployment report came out Friday and was somewhat worse than expected showing an unemployment rate of 7.6% for the nation up from 7.5% the previous month. The most recent initial jobless claims set a new record indicating that there is no end yet in sight for a bottoming of unemployment. Bonds yields rose on the news buoyed by two factors. The first is that the continuing rise in unemployment means that there is continuing and increasing pressure for government stimulus. That stimulus can only be financed by bond market auctions. The second is the market’s increasing focus on the record volume of treasuries that will come to market this year. The Treasury is re-instating the 7 year bond, last seen in 1993, and is significantly upping the rate of bond auctions for the other maturities. Indeed, depending on whose numbers we look the US Treasury will attempt to finance between $1.9 and $2.5 trillion in bonds in the current fiscal year. This is up from the $890 billion last year. The market’s reaction Friday was to drive the 10 year and the 30 year bonds higher with the 10 year briefly hitting 2.9%. That bond traded around 2.05% only a few weeks ago. Taken together these two factors point to the bond market becoming focused primarily on the US fiscal position.

Readers who were in the market during Bush-the-Elder’s reign will recall the term “Bond Market Vigilantes”….Read More

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