Gross: Fed Saving Ammunition to Buy Treasuries?
A: Now why would the fed want to do that?
Via Bloomberg, "Gross Says Fed ‘Saving Ammunition’ in Debt Repurchase Programs":
Bill Gross, who helps run the world’s biggest bond fund at Pacific Investment Management Co., said the Federal Reserve is “saving ammunition” by refraining from increasing purchases of Treasuries and mortgage securities at today’s policy meeting.The fed is saving its QE firepower because they know they will be forced to buy longer term treasuries to satisfy the huge demand from increasing issuance to fund our deficit, bailouts, and hometown stimulus packages. When demand from our friendly foreign funders start to wane we will have to make up for that demand internally, THE FED!
At the previous Federal Open Market Committee meeting in March, policy makers agreed to buy $300 billion of long-term Treasury debt within six months while increasing purchases of mortgage-backed securities to $1.25 trillion this year from $500 billion and doubling purchases of housing-agency debt to $200 billion.
To keep rates low, the fed will be forced to buy treasuries to stabilize that market by purchasing the assets from primary dealers at NY Fed. The effort is the modern day equivalent of printing money electronically. The fed is saving this firepower because they know they will need it in the future. Will the fed be big enough to hold down the treasury market? Doubtful.
A rollover of the treasury market and a surge in rates is seen as one of the more likely unintended consequences that come with where we are right now, and the path we chose to take. I had it listed as one of the Stages Yet To Come, in my discussion on EndGame:
STAGE 10 (Yet To Come, End Game) - Treasury Market?: massive treasury issuance to fund bailouts, nearing the end of rate cut cycle which is yet to come (I'll bet on 75-100 more bps of easing), stabilizing economic data which is far off, unwinding or slowing of treasury purchases by foreigners, rolling over of treasuries, selling of widely owned treasuries for this slowdown, and most of the damage done to equities already may all contribute to the selling of treasuries. The treasury market is arguably at the tail end of a 27 year secular bull market. What will treasury buyers demand in yields 12-24 months from now? Will treasuries still be in huge demand, as they are today, right in the center of the crisis? The end game may bring with it the end to the secular bull market in treasuries and higher yields; especially in the longer end of the curve! How will lenders and businesses adapt to higher borrowing costs should this occur and drag credit rates with it?Should that occur, the environment will have to adjust to higher borrowing costs across the board and the residual damage that comes from large holders of treasury bonds for either rate hedging purposes or safety purposes. The question is how much of an impact internal buying from our fed will cushion any bond market roll over. Are higher yields a sign of future growth prospects OR an unwinding of a crowded trade when issuance is set to soar?
We very well could be witnessing a period of the lowest lending rates that we will ever see for the next 5-7 years. Here is the trend worth watching in the 10-YR treasury via Yahoo Finance:
The US economy is not a very strong patient right now. I'm not sure we can handle an unexpected 'event' sending borrowing rates much higher right now; especially after the equity move we just made pricing in better times
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Posted by RegularAnon
Thu Apr 30th, 2009 10:21 AM
Noah,
Completely agree with you here. I would love to lock in a 1mm + mortgage now -- I'd even be willing to pay the bank their fee, and let them keep the money... All I want is a legal binding agreement to be able to borrow the money in the future at a point of my choosing! Do banks possibly offer a product like this?
Posted by Noah
Thu Apr 30th, 2009 02:26 PM
RegularAnon - yea me too! Only a HELOC offers that and those are being cut back big time! I seriously wonder where rates will be in 24 months, by this time 2011.
Posted by Don
Thu Apr 30th, 2009 03:47 PM
RegularAnon - when rates go up your 1mm home price would go down. Borrow the 1mm (somehow) and hold it for a while - then put it in a CD or into the (now) higher yielding T-Bills they should be paying off at a nice rate but... at what rate will inflation be? What happens to the dollar? Is gold the answer? There seems to be a fairly clear view of what should be coming at us down the Treasury pipeline but (to me at least) a not so clear path as to how to profit from it - or even survive it. Get a helmet.
Posted by RegularAnon
Thu Apr 30th, 2009 04:51 PM
I've already sold my apartment and the apartment i was renting out. I'm sitting on too much cash as it is -- so I don't want to borrow any money now. I just want to be able to lock in a nice rate for a 30 year fixed. I'm willing to pay all the upfront fees charged by the lender for the right to borrow at these current rates at some time in the future -- i think clearly this is beneficial to me, but it would also be beneficial to the bank (as opposed to giving out an actual mortgage now -- not as opposed to giving me a loan in future).
I am also thinking the same thing as you Don, rates will go up and prices will come down. I'll be ready to pay cash -- but I'd rather buy at tomorrow's prices with today's fixed rates? HOw do I make that possible? And why would a bank not want to do that (as opposed to giving out a mortgage in today's environment).
Posted by Anon
Fri May 1st, 2009 11:49 AM
So how much is Gross talking his own book (as usual) and how much is actual reality? He is protecting his own interests after all by betting on renewed bond buying by the Feds.