Macro Economics
The Fed Silently Falters

Related Links
Discussion Boards

By Dwdonhoff
May 28, 2009

Posts selected for this feature rarely stand alone. They are usually a part of an ongoing thread, and are out of context when presented here. The material should be read in that light. How are these posts selected? Click here to find out and nominate a post yourself!

OLE'!!! the Fed silently falters (PAIN!!!)

For over 5 months the Fed had hired 3 prime brokers to run a "buy program" in the mortgage backed securities bond markets. These firms had instructions to buy, with increasing aggressiveness, whenever bonds dropped to certain price levels.

The effects were glaringly obvious (especially when compared to the non-programmed competitive volatility of the 10-year treasuries... a fairly closely-related market.)

Last week on Thursday the bond markets (pressured ongoingly by all who want yields to rise... from China on down the food chain) tested the support levels. The Fed's buyers stood silent. On Friday the trader's cautiously taunted the Fed's buyers again, toying with the previously established "Maginot line" below which any seller would be slaughtered... no response.

Yesterday the bond traders girded their loins and challenged the beast ready to rapidly retreat... and the beast simply collapsed to the side with no resistance whatsoever!

Today the seller's raged...

The 4.25% 30 year coupon leaped up over 200 basis points in cost.

The 30 yr is now about where standard yield curves suggest it normally OUGHT to be in the current markets...

Remaining questions;
A) Will Obama instruct the Fed to "get back in the ring" with a heavier set of gloves (much much more money?)
B) If they try... will it even matter?
C) If it does, how long can they hold back the inevitable?
D) If they don't... how much heavier will the economy bleed due to the interference, and how quickly?

Dave Donhoff
Leverage Planner