Bruce Krasting

Too Early for the Fed to Stop Purchasing U.S. Treasuries?

Tks for this. We shall see what happens to interest rates over the next six months. I think the absence of the Fed POMO buys will make a difference. Rates will have to rise. There is just too much paper that has to be sold.

Two scenarios I see.
A) The economy recovers. Money would go to higher risk and away from Treasuries. This is the crowding out issue. What would an investor rather have, a AAA corporate or a 3% Treasury?
B) Things go wrong and we resume a decline or have no real growth in 1Q 2010. Then we would have another large stimulus plan. This economic situation would likely keep interest rates low. But the amount of new paper to be issued by the Treasury would go up by another $1T and the deficit would widen to a level where bond buyers balk. More pressure on the bonds in that situation too.

In my opinion if an investor buys 10 year Treasury bonds today at a yield of 3.5% they will absolutely lose money. They have to pay tax of 1% on that income. The remaining 2.5% will be lost to inflation.

The Fed has announced that they will purchase 1.75T of bonds. $200b in Agency debt securities, $1.25T of Agency MBS and $300b of direct Treasury securities. Did you exclude the $200b in agency debt as part of the QE total?