The following chart, we propose, has the potential to inspire a whole new way of looking at the gold and Treasury market:
What we love about Bank of America Merrill Lynch’s ‘Liquid Insight’ team is that when they make calls on Treasuries and rates, they account for the impact of collateral markets and the repo effect — not to mention the general shortage of safe assets.
Take the following chart from their latest note: Read more
Arvind Krishnamurthy and Annette Vissing-Jorgensen have an interesting variation on what the Fed should do next: start buying MBS while selling longer-term Treasuries.
Buying MBS, of course, has been widely discussed as a potential option if the Fed chooses to begin another round of large-scale asset purchases, but Krishnamurthy and Vissing-Jorgensen are the first economists we are aware of to advocate also dumping long-term Treasuries. Read more
In addition to blessedly avoiding the inane “Let’s Twist Again” title of many a recent analyst note…
The rates gang at RBC warned before this week’s FOMC meeting that it would be more complicated this time round for the Fed to continue selling short-term Treasuries and buying long-term ones under Operation Twist. Read more
Supply and liquidity, to name two obstacles for an extension of the Fed’s policy of selling short-end Treasuries and buying long-dated ones.
Doesn’t mean they’re insurmountable, only that it will be a little more complicated this time should the US central bank take this route. Read more
It was inevitable that the abysmal payrolls report last Friday would make louder the calls for another round of quantitative easing from the FOMC, which meets later this month.
QE can take various shapes, but we wanted to mention something about the specific idea of the Fed buying up more US Treasuries: as a few analysts have pointed out recently, there’s a pretty good chance that rates will stay low no matter what the Fed does. Read more
You can also read it and be very confused about the Fed’s comms.
Even if it might just have been intended as a piece of comms or trial ballooning. (By whom at the Fed? Who’d talk out of school ahead of the next FOMC meeting?) Read more
Given the recent improving economic data in the US, the consensus likelihood of getting QE3 later this year seems to have gone from probable to uncertain.
Obviously it all depends on what happens in the next few months, with particular emphasis on employment trends and inflation expectations. For his part, Bernanke certainly hasn’t done anything to dismiss the notion that he’d like to keep going, emphasising the influence of the depressed housing market and arguing that the unemployment rate understates the true severity of problems in the labour market. Read more
Minutes from the September US Federal Reserve rate-setting committee meeting show that some members supported a new round of quantitative easing as an option, suggesting that “QE3” is still possible if the economy weakens further, the FT reports. “A number of participants saw large-scale asset purchases as potentially a more potent tool that should be retained as an option in the event that further policy action to support a stronger economic recovery was warranted,” say minutes of the meeting, released on Wednesday. The minutes suggest there is still an appetite on the rate-setting Federal Open Market Committee for more measures to support growth in addition to Operation Twist announced in September. While three of the 10 FOMC members voted against Twist, the minutes reveal that two other members thought that the outlook supported stronger action, and voted for Twist only because “it did not rule out additional steps at future meetings”. Read more
The US Federal Reserve considered a new round of quantitative easing as an option at its September monetary policy meeting, suggesting that “QE3” is still possible if the economy weakens further, the FT reports. “A number of participants saw large-scale asset purchases as potentially a more potent tool that should be retained as an option in the event that further policy action to support a stronger economic recovery was warranted,” say minutes of the meeting, released on Wednesday. At the September meeting the Fed launched “Operation Twist” – a $400bn programme of selling short-dated and buying longer-dated Treasuries – in an effort to drive down long-term interest rates and support a failing economic recovery. But the minutes suggest there is still an appetite on the rate-setting Federal Open Market Committee for more measures to support growth. While three of the 10 FOMC members voted against Twist, the minutes reveal that two other members thought that the outlook supported stronger action, and voted for Twist only because “it did not rule out additional steps at future meetings”. Read more
Also known as the Great Monetary Policy Brainstorm.
That’s a pithy summary of the minutes from the September FOMC meeting, which were released on Wednesday afternoon. You already know the policy decisions. Read more
According to a Bloomberg survey of global investors, the US Federal Reserve’s plan to reinvest $400bn of short-term debt into longer-term debt will not lead to a decrease in the unemployment rate. The survey involved 1,031 investors and 78 per cent of those polled thought that the move won’t help the 14m Americans who are currently unemployed. Read more
Federal Reserve chairman Ben Bernanke said on Wednesday the central bank might need to ease monetary policy further if inflation or inflation expectations fall significantly, Reuters reports. In his first public remarks since the Fed launched ‘Operation Twist’, Mr Bernanke indicated a willingness to push deeper into the realm of unconventional policy if economic growth remains anaemic. ”It is something that we’re going to be watching very carefully,” Mr Bernanke said in response to questions from the audience at a forum sponsored by the Cleveland Fed.”If inflation falls too low or inflation expectations fall too low, that would be something we have to respond to because we do not want deflation.” The FT says Mr Bernanke also said the US can learn how to boost long-run growth from successful emerging economies, in a speech that will delight developing countries more used to admonishment than admiration from Washington. Emerging market growth shows “the importance of disciplined fiscal policies, the benefits of open trade, the need to encourage private capital formation while undertaking necessary public investments, the high returns to education and to promoting technological advances, and the importance of a regulatory framework that encourages entrepreneurship and innovation while maintaining financial stability”, he said. Read more
Federal Reserve officials have launched into a round of public speeches defending last week’s announcement of “Operation Twist”-style bond purchases, the WSJ says. Fed governor Sarah Bloom Raskin and Fed regional presidents Dennis Lockhart and Eric Rosengren have all made defences this week of the programme, which sets out to reduce long-term interest rates by extending the maturity of the Fed’s bond portfolio. The president of the Dallas Fed, Richard Fisher, has however argued that the Twist purchases may backfire, Reuters reports. Fisher, an inflation hawk, ignores that the maturity extension may fail precisely because it lowered inflation expectations, Tim Duy argues. Read more
To our inbox this morning came a note from RBC arguing that the FOMC statement last week acted as a kind of “Anti-Stimulus”.
Here’s the explanation: Read more
The end-users, the clients, the buyside. Or in more standard parlance – institutional investors. Not “buyside” like hedge fund — more like your pension fund, insurance companies, reserve managers, sovereign wealth funds, and investment funds more generally.
While chapter one of the IMF’s Global Financial Stability Report covered the €200bn capital hole spillovers, chapter two discusses the characteristics and behaviour of institutional investors. Read more
The Fed’s attempt to stimulate the economy will add to the pain already being felt by company pension plans, reports Reuters. The dual whammy of falling stocks and declining yields means that pension assets currently only cover 79 per cent of their liabilities, according to consulting firm Milliman Inc. The consultancy also stated that this could fall as low as 60 per cent within two years if equities and rates continue on their current trajectory. Read more
The narrative around the Fed’s announcement on Wednesday is that it went ahead with a $400bn ‘twist’, towards the larger end of what was expected — despite some pretty heavy pressure from the Republicans a couple of days earlier.
But was the launch of Operation Twist such a fearless easing measure, after all? Read more
The US Federal Reserve on Wednesday launched “Operation Twist”, announcing it would buy $400bn of long-dated Treasuries, financed by the sale of an equal amount of bonds with three years or less to run. However Asian stocks tracked Wall Street lower as investors took fright at the sentiment in the Fed’s statement, which referred “significant downside risks to the economic outlook”. The FT reports the Fed also sprung a surprise by pledging to reinvest any early repayments from mortgage securities back into debt issued by mortgage financiers such as Fannie Mae and with a strong focus on buying 30-year Treasuries. Such a big move suggests that Ben Bernanke, Fed chairman, is alarmed by the slowdown, and has decided to override opposition on the rate-setting Federal Open Market Committee and provide as much stimulus as easily practical. The purchases will run until June 2012. Market interest rates moved, but not enormously, suggesting that a large “twist” was already priced in. There are also continued doubts about how much households will respond to lower interest rates at a time when they are trying to pay down debts left behind by the financial crisis. Read more
The US Federal Reserve launched “Operation Twist” on Wednesday in a bold attempt to drive down long-term interest rates and reinvigorate the faltering economy, reports the FT. The central bank said that it would buy $400bn of Treasuries with remaining maturities of six to 30 years and finance that by selling an equal amount of Treasuries with three years or less to run. “This programme should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative,” said the Fed. The policy is named after a similar attempt to “twist” the shape of the yield curve in the early 1960s. The Fed also sprung a surprise by pledging to reinvest any early repayments from mortgage securities back into debt issued by mortgage agencies such as Fannie Mae and with a strong focus on buying 30-year Treasuries. “We got a double twist,” said Diane Swonk, chief economist at Mesirow Financial in Chicago.
Operation Twist is mostly priced in at this point, but has the market priced it correctly?
Credit Suisse have a short note saying that markets have overestimated the amount of purchases that will head to the longer end of the curve when the Fed sells from its front-end bucket… Read more
This is getting ridiculous.
At this rate there won’t be any point logging on to read the FOMC minutes on Wednesday evening. FedWire, the unofficial/official news service of the Federal Reserve, has done such a comprehensive briefing the market on what to expect that there can’t possibly be any surprises… can there? Read more
The Federal Reserve is debating adopting different targets for inflation or unemployment as it considers its options over further stimulus, the WSJ reports. Fed chairman Ben Bernanke also has the votes he would need to resurrect “Operation Twist”, a stimulus option of altering the Fed’s Treasuries portfolio to include longer-term debt, thus reducing long-term interest rates. The debate over targeting is unlikely to be resolved in September’s meeting, but is focused on the best criteria to support the Fed’s commitment to keep rates low. Operation Twist II would likely see the Fed buy up 10-year bonds, but the 10-year yield has already reached a 60-year low of 1.88 per cent, the FT says. Read more
The Treasury would seek to accommodate a future Federal Reserve move to bring down long-term interest rates in a repeat of ‘Operation Twist’, people familiar with the matter told the FT. In a Twist policy the Fed would buy up long-term debt. The Treasury will not change its debt issuance to take advantage of the fall in rates if the Fed goes forward with the plan, one of the ideas for further stimulus that are under consideration, despite its goal of lengthening average maturities on the national debt. The main obstacle to Operation Twist II may be in the market, WSJ MarketBeat says, noting that it could already be priced in. Read more
The US Treasury would accommodate a possible Federal Reserve stimulus to drive down long-term interest rates, the FT says, citing a person familiar with the Treasury’s thinking. The effectiveness of ‘Operation Twist’ would depend on how the Treasury reacted. If it pushed the other way, and took advantage of the Fed’s buying to sell more long-dated debt, then it could minimise the effect on interest rates. However, the Treasury would be unlikely to respond to falling long-term interest rates with a sudden shift in the pattern of debt issuance, even though one of the Treasury’s strategic goals is to increase the average term of the US national debt. Read more
Found.
Someone who thinks a change in the composition of the Federal Reserve’s balance sheet (a new Operation Twist) would be a good idea. Read more
… some sort of easing, again.
He had already set it at Jackson Hole and the August 9 FOMC, and mostly confirmed by the minutes of that meeting. Read more
Treasuries have gone through the looking glass.
As we’ve discussed, it’s largely because market participants have become overly obsessed with holding safe-haven securities, demanding Treasuries and nothing else. Read more
Older entries
1The end of QE?
2Man walks into a gold bar. Au!
3The persistent supply-side constraints in US housing
4Bird, plane, Abe
5Bove vs Bloomberg, redux
Show more6A glorious episode in the history of the Revenue
7Stress you next year
8Alphachat: Lee Buchheit edition, featuring Lee Buchheit
9The (early) Lunch Wrap
10The US collateral shortage lives on
Show fewer