What Latest Fed Move Means for ETFs

How does the Federal Reserve’s statement today affect Treasury bonds and exchange traded funds (ETFs) that hold the government debt?

The Federal Reserve announced midday that it will begin large-scale purchases of 30-year Treasury Bonds to the tune of $300 billion over the next six months, reports David Goldman for CNN Money. This would help the government accomplish two goals, according to many economists:

1. Lower interest rates on corporate debt and mortgage loans
2. Maintain a critical level of support for the bond market to keep values higher

Federal Reserve Chairman Ben Bernanke has made statements that the central bank will use “all the tools” available to revive economic growth, so this move had been expected. Bernanke also left a key short-term bank lending rate at a record low of between zero and 0.25%.

Since interest rates fall as bond prices rise, the money going into 30-year bonds would help push down yields. They’ve been inching up toward 4% after falling to near 2.5% in December. Additionally, by sending prices up, the central bank could help lure more buyers to help prop up a slumping market.

• Vanguard Long-Term Bond (BLV): down 10.6% year-to-date

Meanwhile, Bill Gross, manager of Pacific Investment Management Co.’s $138 billion Total Return Fund, upped his holdings of U.S. government debt 15%, the highest percentage since last July 2007, reports Dakin Campbell for Bloomberg.

While the government debt category includes Treasuries, Gross has said in the past that PIMCO is not interested in buying the securities. In February, Gross said it was dependent upon the Federal Reserve to buy Treasuries but that he wouldn’t follow the central bank’s lead.

Comments

[xsellside:]

Don't forget TBT, PST and others...

Mar 18 04:06 PM

[samwise:]

fools gold. sure to give a lift in the short term--but to what? prices of actual physical real estate? NOT! Citizens will be spending EVEN MORE money on fuel for their vehicles, air-conditioning and heat for their homes and just plain old food. I don't want to move to North Dakota but right now it looks like the only safe haven left! Honey, grab your pitchfork and dungarees! Looks like it "Down on the Farm" with Little Feat after all!

Mar 18 04:23 PM

[Stephen Yu:]

With this latest move, the FED is signaling that there are not enough buyers for US Treasuries. At the beginning of this crisis, it was hard to find buyers of "toxic" assets" like MBS and CDS. Now, even US Treasuries have trouble finding buyers and the FED has to step in as buy-of-last-resort! Does it mean that Treasuries are now in the toxic asset category? If people do not trust US Treasuries, they do not trust the US. If they do not trust the US, they don't trust the dollar. And when the FED purchases Treasuries, it is printing money. This cannot be good for the dollar as it is getting debased.

Mar 18 05:29 PM

[r cohn:]

Printing money,pure and simple.The goal of the current administration is to create inflation; eventually they will succeed.What is amazing about this current move is the level that the fed is buying treasuries.Prices are close to an all time high and not an all time low.Printing money along with record deficits will in a few years create a different problem which will tear apart the very fabric of society.Expect a short term rally in the treasuries and get long 10 year notes at a level of about 2%.Hold on for the biggest up move in yields in history

Mar 18 08:12 PM

[BxCapricorn:]

As r cohn said, this could "tear apart the very fabric of society", and judging by the stomach bulges I've seen lately, we've got to get people into a gym, or on some kind of weight loss program before this happens. Hopefully, Mr. Geithner (if that's his real name) has a plan for this.

Mar 18 09:45 PM

[Minlita:]

The initiative would likely have "a huge impact" on the economy by bringing down many lending rates that the central bank cannot directly control.
More money circulating (they call it "quantitative easing." but we just say: "printing money.") will bring down a wide range of borrowing costs.

Mar 18 10:28 PM

[jmorr:]

Just concidence that China was expressing concern over Treasury holdings last week?...hmm, don't suppose Fed is helping China unload some holdings without disrupting market...can't bode well for future rates!

Mar 18 11:25 PM

[aarc:]

Bad for China.

Wait! it is good for China.

See, China will stop feeding the US with cash in order for the US consumers to be able to buy more products from China.

Therefore, China is going to expect lots more income deterioration from it's export-oriented industries.

Therefore, China will have to step up it's own economic programs as fast as possible before their export earnings deteriorate and not be capable of sustaining their economy to it's current elevated levels.

This is going to create a new breed of consumers in China with more sophisticated tastes than what they have now. We know most educated and informed Chinese would like to live like the over-indulgent Americans so they ramped up their exports in order to be able to create new wealth. There are hundreds of millions of them now. But only the few and the privileged class were able to do so because of the high capitalization cost needed for export oriented businesses. If China ramps up it's recovery program by developing it's own local consumer-based economy much like the US of the 50's to 90's; then it can result in a more than half a billion "new" breed of consumers from the ground up since even those that are not well capitalized will be able to create their own small businesses in China that will cater to their local customers.

With China spearheading the accumulation of wealth by creating a new breed of local-based consumer economy; India and the other smaller developing countries are going to follow the lead and start changing their national focus from export-based economy to home-grown economy. This is going to hasten their transition from being developing countries to fully developed countries much like the United States and Germany and Japan. Being small, young and nimble; these developing economies are capable of bouncing back to normal health in a much shorter time than the US and Europe.

In the long run; the United States, as soon as it is able to solve current economic crises; will be able to export more products into those new-breed consumers of China, India and other developing countries as their economies started to gather signifcant progress with their own local-based economies or rather self-sustaining economies rather than export-based economies.

How could the US be able to compete with cheap labor? Perhaps robotics. The United States will have to ramp up it's factory automation capabilities in order to be able to offset high cost of local labor. In the long run, as the developing countries start gaining status as developed countries or near-developed countries; their local salaries are going to increase and start approaching Western standards.

This is not bad for the United States. As soon as the US is able to get out of this hell-hole called severe recession and be able to prevent the onset of depression; the administration, together with the international companies, will have to start formulating new strategies for a new breed of export-oriented industries that will be able to sell new or existing products to China as soon as the first signs of growing local-based consumers in China starts to appear.

This latest gargantuan move by the Fed may prove to be a blessing in the long run since the United States is not expected to be able to revive it's own economy based on the old reliable consumerism industries as it's own population starts entering retirement age and is therefore not capable to sustain a booming consumer-based economy.

Two birds in one shot. Shoot deflation straight through and through with enough force for the arrow to bounce back and solve the deteriorating export income of the US in the long run.

Is this not possible or just a pipe dream?

Mar 19 05:53 AM

[jswede:]

sorry Mr Yu - meant to "+" ya, but I hit "-" by mistake


On Mar 18 05:29 PM Stephen Yu wrote:

> With this latest move, the FED is signaling that there are not enough
> buyers for US Treasuries. At the beginning of this crisis, it was
> hard to find buyers of "toxic" assets" like MBS and CDS. Now, even
> US Treasuries have trouble finding buyers and the FED has to step
> in as buy-of-last-resort! Does it mean that Treasuries are now in
> the toxic asset category? If people do not trust US Treasuries, they
> do not trust the US. If they do not trust the US, they don't trust
> the dollar. And when the FED purchases Treasuries, it is printing
> money. This cannot be good for the dollar as it is getting debased.

Mar 19 01:10 PM

[omooc:]

The caption to this post [... ETFs] is misleading. Only one -- and irrelevant at that -- ETF is mentioned. As xsellside properly asked: what about TBT, PST, etc.
aarc's comment that " But only the few and the privileged class [in China] were able to do so [act as over-indulgent Americans] because of the high capitalization cost needed for export oriented businesses" is beyond my comprehension. My suggestion: try to read the op-ed piece, by the dean of U of Singapore's businss school, in today (3/19/09)'s Financial Times.

Mar 19 08:52 PM