Last week the Fed announced it will keep interest rates between 0% - 0.25% for an extended period. No surprises there, but does an extended period of time mean some time in 2010 or 2011 or years from now?
The Fed also announced it would be slowing its purchase of Mortgage-Backed Securities. The Fed previously said that it will buy $1.45 trillion in mortgage-backed securities from US banks and that this program will end by the end of 2009, they have now changed course slightly and said that they will be extending the program until the first quarter of 2010. Just a bit concerning because the next announcement maybe that they are adding more money to the program and extending the program through 2010 and piling on more debt.
This is not much of a surprise announcement by the Fed. The Fed performed a similar act with its Quantitative Easing Program. Given the increasing public outcry about the Fed piling up debt at an alarming rate, buying toxic debt may not be the best move. Fed's balance sheet and buying toxic debt may become a hot topic in the near future.
The Fed announced that it would let its Quantitative Easing program end in October. This program is a way of saying that the Fed has been buying US debt in order to finance Obama's massive deficit.
The Fed accounted for nearly half of all Treasury purchases in the second quarter $164 billion out of $339 billion. The Fed's purchases outnumber foreign holders (foreign governments), US households, and Primary Dealers (mega banks) combined. Note that foreign holders reduced their purchases of US debt by over 35% from $159 billion in 1Q09 to $101 billion in 2Q09.
These facts point to the impending popping of the US Treasury Markey bubble. The above facts indicate that if the Fed's heavy handed activity was absent in 2Q09 in the Treasury market possibly could have had failed auctions. It also shows foreign holders reducing purchases of US debt at an alarming rate, which will ultimately impact interest rates.
US Treasuries will have to become a lot more attractive (lower price = higher yields) for foreign investors to start buying again. The Fed will have to either sacrifice stocks or the US dollar. If the Fed does in fact end Quantitative Easing in October then we'll see what the market really thinks of US debt as an investment class. It's clear from the above data that foreign holders want higher rates (yields) in order for them to start buying more heavily. However, the Fed wants to keep rates low since it is the life support system of our housing market. The US Treasury market could be the next crisis brewing. Let's see how the Treasury market operates without the life support which has been provided by the Fed.
